For anyone who wants to borrow money to have your own home, a mortgage is your access point. It is the gateway to that weekend getaway in the countryside.
While the process of a mortgage is reasonably straightforward – apply to borrow money, receive funds, buy property, pay back the amount borrowed – the reality is much more complex. And sometimes the options available can be overwhelming.
Deciding between a tracker and fixed rate often leaves applicants sighing in frustration as they try and navigate which option is best for their needs.
But fear not!
In this article, we explain two key terms in the mortgage industry that often cause confusion: fixed rate and tracker mortgages.
The role of the Bank of England
Before getting into fixed rate and trackers, let’s first look at the role of The Bank of England. They set the base rate, which is the amount they charge to lend money to mortgage-lending companies. Lenders then use the base as a reference for their own costing structure, which changes in line with The Bank of England base. The base rate has a major impact on what you will pay whether you take a tracker or fixed-rate mortgage.
What are tracker and fixed rate mortgages?
The Bank of England base rate is currently 0.75%, after it was moved up from 0.5% in 2018. Even with the slight increase, the base rates have been considerably low for many years now. As a result, most applicants tend to favour a fixed rate mortgage.
If you choose to take a fixed rate mortgage, you lock yourself in to a fixed monthly payment for an initial period – often one, two, three or five years. If the base rate increases or decreases in that time, your mortgage payment will remain the same.
Tracker mortgages do what they say on the tin: they track the base rate from the Bank of England and change accordingly. If the base rate increases by 1%, your mortgage will increase at the same rate and your monthly payments will go up.
It works the other way, too: if the base rate decreases, your mortgage payments become lower. Some lenders may also apply a ‘collar’, which sets a minimum interest rate for your mortgage payments. This means that your interest rate will only go as low as the ‘collar’, even if the base rate drops lower.
Tracker mortgages typically last for anything between one, two, three, five or 10 years. It’s important to remember that, just like fixed rates, the lender will apply their own interest on top of the base rate: eg, if the repayment is set at the base rate plus 1%, you will pay 1.75% – if we’re taking into account the current 0.75% base rate.
Advantages and disadvantages
Both types of mortgages come with pros and cons. However, the recent base rate rise from the Bank of England means that many could potentially favour fixed rates.
Fixed rate pros and cons
Fixed rates typically offer more security, as the borrower is protected from any sudden rises in the base rate from the Bank of England. They are also fairly straightforward: you know how much you need to pay for the duration of the initial terms.
Many fixed rate deals come with hefty arrangement fees, which can be as high as £2,000. These are either added to the amount you borrow or are a separate charge that you need to pay when completing your mortgage.
Tracker pros and cons
A tracker mortgage follows the Bank of England base rate and adjusts accordingly. If the base rate drops, so do your monthly mortgage repayments. Sometimes there is an option to overpay your tracker mortgages, meaning you can pay the total amount off faster.
While the idea of a mortgage adjusting itself to a lower base rate is appealing, the opposite is true with tracker mortgages. If the base rate increases, your monthly mortgage repayments also increase. Even if you budget accordingly, not having a steady repayment structure can be frustrating.
Finding the best deal while making mortgages easy
If you prefer the security offered by a fixed monthly payment, then a fixed-rate mortgage might be the better option. But if you like to keep up with market movements, it may be that you feel more comfortable taking out a tracker mortgage. You can keep an eye on the Bank of England base rate and compare any deals accordingly.
With our guide, you should be able to tackle mortgage products with confidence and enthusiasm, better understanding the differences between tracker and fixed-rate mortgages. The result will help you make decisions that best suit your needs.
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