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Fixed, Tracker or Variable Rate Mortgage?

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Getting a mortgage these days can be pretty tricky, with banks tightening up their conditions for lending and in turn forcing customers to save up larger deposits, have impeccable credit history and stable employment to get the best deals. Once you have battled your way through the ‘screening’ process, the hard work doesn’t stop there. With so many mortgage deals on the market it is difficult to decide what kind is best for you in the short term and long term. It’s a big decision and one which you may be tied into for many years, so getting the right one is essential.

Be a savvy mortgage shopper

Before the banking crisis, the most popular type of mortgage was one which included a fixed interest rate for a set period of around 2 to 5 years. After which, the mortgage would return to a variable rate which was usually around 2% more then the base rate. This meant that customers knew their mortgage was fixed regardless of any fluctuations with interest rates. After the base rate was cut right down to just 0.5% many people who were already on a standard variable or tracker mortgage have benefited from their repayments being reduced while those who were locked into their fixed rate mortgages missed out on the savings. As a result most banks changed their terms for new deals and the standard variable rate mortgage can be anything between 2% to 6% above base. A good mortgage should still leave borrowers with a good deal once the initial period ends and even though many people avoid switching due to the time and paper work, a savvy consumer can shop about and get a really great deal.

Houses section 21

Standard Variable Rate Mortgage

The standard variable rate (SVR) can be less competitive as they are set according to the lender and loosely follow the Bank of England’s rate, although lenders don’t have to pass on any reduction in interest if they choose not to. When most introductory offers or fixed term deals end, the mortgage will move onto an SVR. The difference between an SVR and a tracker mortgage is that a tracker will be based directly on the Bank of England’s base rate and so if that is slashed to 0.5% like it has been, the saving’s must be passed on. As a result, banks have increased their tracker rates to that which is considerably more that the base rate. Those on tracker rates have benefited the most in the fall of interest rates with many paying zero interest on their mortgage. However, if you are getting a new mortgage or switching your current one, you need to take into consideration how long the interest rate will remain at 0.5%. You may be able to afford your repayments now but should the interest rates rise (and they will at some point) can you afford the increase in payments?

Tracker Mortgage

If you have been on a tracker prior to the interest falling and were paying considerably more, or if you can afford to repay more each month on your mortgage, you may want to consider making additional over payments now while you can afford  it and take full advantage of the low interest. The amount of money you owe will be reduced much quicker and your mortgage will be paid off much sooner. If the base rate then rises, you will still be used to paying the same amount and so will have a lesser impact on your finances. If you’re taking out a new tracker mortgage, look into deals where you aren’t tied in, one that has a cap on how high interest can go and make sure there are no early redemption charges so that if another deal is more attractive, you are free to leave with no hefty penalties!

Fixed Rate Mortgage

Many people prefer the security a fixed rate mortgage provides. There’s no worry about interest rising and falling and you know exactly how much your mortgage repayments will be, every month for the next however many years. Banks are aware that people are nervous when it comes to mortgage costs increasing and so charge you for the privilege of security, meaning you normally pay more per month for a fixed rate. With it comes some steep charges if you want to leave, so if you are planning on moving house during the terms of your deal, ensure the mortgage is portable.

Your Mortgage, Your Choice

So the question is do you want to reap the benefits of lower payments and risk a big increase in the future or prefer to plan your finances a little more concretely? Advice from family, friends or ideally an independent financial advisor can help with the decision, but the choice should be yours and what is best for your financial situation.

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About Rebecca Robinson

About Rebecca Robinson

After spending the last 8 years juggling life as a mum of two, wife and working full time as a Project Manager for a global telecommunications company, Rebecca Robinson made the decision to follow her love of writing and took the plunge; turning her passion into a full time career. Since becoming a full time writer, Rebecca has worked with various media and copy-writing companies and with the ability to make any topic relevant and interesting to the reader, now contributes to The Working Parent on articles ranging from credit cards to teenage relationships. Ever the optimist, Rebecca's dreams for the future include a house in the country filled with children, dogs and horses in the field!

Website: Rebecca Robinson

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