To track or to fix?

When it comes to mortgages, choosing between a fixed rate and a tracker deal can be a difficult decision. With so much economic uncertainty and speculation over the Bank of England base rate, borrowers can decide to fix their mortgage and have the certainty of set payments or go for a cheaper tracker in the hope the Bank of England base rate stays low for the foreseeable future.

It's a tough call and much depends on your own personal circumstances, your attitude to risk and how you think Bank of England base rate will move in the future.

Fix your mortgage

The main benefit of a fixed rate deal is that if interest rates rise during the term of the mortgage, your payments will stay the same. For instance, you may get a deal charged at 2% interest for three years and it doesn't matter what happens to the Bank of England base rate, your fixed rate is set in stone and you know exactly what your monthly repayments are for the period of time you agreed to. 

Most mortgage lenders offer a range of fixed rate mortgages with two year fixed rates being popular, although some borrowers are opting for longer-term fixed rates of three, five, seven or even ten years. These longer-term fixes offer borrowers more security and cut down remortgaging costs, but you are likely to have to pay a hefty penalty, known as Early Repayment Charges (ERCs), to leave if you decide to switch to a different deal within the fixed rate period.

Fixing your mortgage for an extended period of 5 years or more can protect you from rate rises and give you certainty over your repayments. There is much uncertainty surrounding Brexit and its effect on interest rates, therefore you may prefer the security of locking yourself into an affordable deal now. While the base rate has risen a couple of times since the historic low of 0.25%, it remains low compared with previous decades. That said, it’s difficult to predict what the market will look like in seven years’ time. Rates could drop, which could leave you locked into a deal that no longer seems as attractive.

Tracking the Bank of England base rate

A tracker mortgage is usually linked directly to the Bank of England base rate. The rate of interest applied to your borrowing will be set at a fixed margin above the Bank of England base rate and it will increase and decrease throughout your mortgage term in line with the movements of the Bank of England base rate; this means your payments will also increase and decrease. So if the Bank of England base rate goes up by 0.5%, your rate will go up by the same amount. Conversely, if the base rate falls by 0.5%, so will your mortgage payments.

 

When deciding between a fixed rate mortgage and a tracker mortgage, you need to take a stance on where you think Bank of England base rate is heading. No one really knows what the future holds and when exactly the Bank of England base rate will rise again. 

No matter what you decide, your primary consideration should be about what repayments you can afford if rates rise, which they inevitably will. We can help you decide what's best for you and will help you choose the right deal depending on your financial situation and requirements.

Contact us for a free, initial no obligation mortgage consultation.