With the cost of fixed rates recently increasing, it is causing many homeowners who have previously had fixed-rate mortgages to consider tracker mortgages for perhaps the first time. But could they be right for you?
What is a fixed-rate mortgage?
A fixed-rate mortgage means that your mortgage interest rate is fixed for a set period of time, so your monthly payments remain the same throughout your fixed-rate deal. Many people believe you can only fix your mortgage interest rate for 2 or 5 years, but actually, there are also 3, 7, 10-year fixed-rate mortgage deals available. You can even find fixed-rate mortgage deals that fixes your interest rate for the life of your mortgage (these are known as lifetime fixed rates).
What is a tracker mortgage?
Whereas fixed-rate mortgages mean the interest rate stays the same for a period of time, the interest rate on a tracked mortgage will fluctuate. This is because a tracker or variable mortgage tracks a baseline (commonly the Bank of England base rate) so if this moves up or down, your monthly payments will follow. A tracker mortgage is also known as a variable type mortgage as your monthly mortgage payments can vary.
Is a tracker mortgage the same as a discounted variable rate mortgage?
A discount variable rate mortgage is a type of variable rate mortgage but the mortgage lender offers you a discount on its standard variable rate (SVR) for a fixed period of time, typically a couple of years. As the mortgage lender’s standard variable rate changes, so will your monthly payment. Once you come to the end of that period, you start paying the higher standard variable rate unless you remortgage onto a better deal.
Things to consider when deciding between a fixed rate or tracker mortgage deal
Whilst it can be tempting to focus on the initial interest rate and opt for the deal offering the lowest interest rate, this is not always the right thing to do. When choosing the type of mortgage most suitable for you, it is important to look beyond the initial interest rate and consider the other features and benefits of the mortgage deal along with any disadvantages.
For example, it is important to consider:
- Your risk appetite – do you prefer the certainty of your monthly mortgage payments remaining the same or are you comfortable that your payments may increase as well as a decrease?
- Your surplus budget – do you have spare funds in your monthly income to absorb any increases to your mortgage payment if the interest rate increases?
- Your opinion on the future of the financial market – do you believe interest rates are going to increase/decrease and over what period of time?
- Your future plans – what are your short/mid/long-term property goals? Are you planning to sell/move/pay off your mortgage and in what timescale?
- Are you happy to be tied into a mortgage deal and if so, for how long?
- Are you living in the property that is mortgaged or is it an investment/rental property being mortgaged? Perhaps you are a Buy-to-Let landlord or property investor.
- Is your mortgage a repayment mortgage or an interest-only mortgage?
Don’t make this mistake!
Many people choose their mortgage deal because it is the cheapest initial interest rate at the time. Without realising, this could cost you more in the long run.
The lowest interest rate doesn’t always mean the most cost-effective deal overall.
For example, you may find that a deal with a slightly higher initial interest rate but no mortgage lender arrangement fees may be more cost-effective for your circumstances than a deal offering a lower interest rate but you have to pay an arrangement fee to the mortgage lender to secure this. Therefore it is important to focus on the overall cost of the mortgage deal rather than the initial interest rate.
Also, the mortgage deal with the lowest interest rate may not only cost you more in the long run, but it may not be suitable for your individual circumstances when factoring in all of the above considerations. This is why we always recommend you seek mortgage advice from a mortgage expert when either buying a property or remortgaging.
The Mortgage Pride are a family-run, whole-of-market mortgage broker based in Stoke-on-Trent, Staffordshire with over 19 years of experience in matching people to the right mortgage for their needs. So if you want to be confident that your mortgage deal is right for you, contact us today.
*Your home may be repossessed if you do not keep up repayments on your mortgage. You may have an early repayment charge to pay to your existing lender if you remortgage early.
Also, take a look at our June 2020 e-magazine