To Track or Fix | Which mortgage is better?

It’s the big question that faces all homebuyers or those looking to remortgage – should I go for a tracker deal or a fixed rate mortgage?

Each has advantages and disadvantages but in these ever-changing times which is the better option?

The difference between the two are almost self-explanatory.

Fixed Rate

A fixed rate deal pretty much does what it says on the tin. It’s a rate fixed for a set period of time so you will know exactly what you are paying over that time frame - normally two, three and five years although longer time frames of 10-years, 15-years and more are becoming increasingly available. But if you have to redeem your loan before the term expires, you’ll normally face an Early Repayment Charge.

Tracker Rate

A tracker mortgage is a type of variable rate which will normally track or move in relation to the Bank of England’s official borrowing rate (known as the Base Rate) with a fixed percentage added on top.

For example, it could be ‘Base Rate +1%’, which means you will always be charged 1% above the base rate.

So unlike fixed-rate mortgages, a tracker rate can change. That means the amount you pay each month could go up if interest rates rise.

The main benefit of tracker deals is that they typically don't come with early repayment charges which means if Base Rate falls, and mortgage rates follow – or your circumstance change - you could switch at any time.

Is a fixed rate or tracker mortgage better? 

Choosing between a tracker or fixed rate mortgage will depend on your own appetite to risk. According to UK Finance (the trade body for mortgage lenders) around three quarters of existing homeowner mortgages are on a fixed rate contract which means when the Bank of England Base Rate moves for most the change in the Bank Rate will have no effect on their mortgage rate in the short term.

But any movement – up and down – by the Bank of England’s Base Rate will most likely affect mortgage borrowers who have variable tracker rate mortgages.

Inflation

The current Bank of England Base Rate is 5.25% and some experts predict that inflation will continue to head down from the 4% it is sitting at now. If they’re correct, then Bank of England Base Rate could also follow. But that’s not guaranteed, and rates can go up as well as down.

And while mortgage rates have come down in recent months it’s impossible to predict which way the wind will turn in the current market.

With money markets still unsettled, even after last week’s Budget, opting for a smaller term fixed rate with no early repayment charges could be a viable option for most people.