If you are new to the whole business of finding a mortgage, the sheer range of products available – not to mention the different terms used – can be more than confusing. Faced with the choice, for example, is a fixed rate or tracker mortgage likely to be the best one for you?
Fixed rate mortgage
Just as the name suggests, if you borrow wit a fixed rate mortgage type, the rate of interest that you pay on your mortgage is fixed. That is not to say that the rate is fixed throughout the whole life of your mortgage, but for a given period of time – five years, for example, might be a typical duration.
The great advantage with a fixed rate mortgage type is that it offers just that – a rate of interest, and therefore monthly repayments, which stay the same for the duration of the deal. This can be very helpful, of course, if you are working to a tight budget and are worried about the possibility of a sudden increase in the cost of your mortgage instalments.
By the same token, however, you may feel that you have chosen unwisely if the prevailing Bank of England base rate – and, with it, your mortgage lender’s variable rate of interest – should fall. In that case, the opportunity of reducing your mortgage repayments will have been frustrated by your being locked into a fixed rate of interest (or face the prospect of paying a hefty penalty for switching to a different mortgage before the fixed rate term has expired).
For this reason, you might want to give careful consideration to the period of time that you feel comfortable making fixed rate mortgage repayments.
Alternatively, of course, you may opt straight away for a tracker mortgage. It gets its name simply from the fact that the rate of interest, in this case, constantly “tracks” the Bank of England base rate of interest – if the base rate goes up, so does your mortgage interest rate; if it comes down, so too, does the cost of your mortgage. This happens automatically, without the intervention of your mortgage lender in deciding to change its variable rate of interest.
Although you may find that the current cost of a tracker mortgage is slightly cheaper than a fixed rate mortgage, you are taking on the risk of the underlying rate of interest increasing (although also reaping the benefits of it falling).
A tracker mortgage, therefore, carries greater risk. When interest rates are already very low (as at present), it is unlikely that they can fall further and unlikely, therefore, that your mortgage will become cheaper. Should the rate rise, of course, you will find yourself immediately subject to that increase in the cost of your tracker mortgage.
The best for you?
As can be seen, therefore, there are advantages and drawbacks to both a fixed rate mortgage and a tracker mortgage. The one that is the best for you is likely to be the one that suits your own particular circumstances and needs – neither the one nor the other can be described as absolutely “better”.
For more information on mortgage visit the mortgage section of moneysaving expert website.