Is a Fixed or Variable Rate Mortgage Better?

The main types of mortgages that we tend to choose between are fixed and variable rate ones. These differ in a significant way and it is good to understand what the differences are so that we are able to make sure that when we are choosing a mortgage, that we make the right choice for us.

Features of a Fixed Rate Mortgage

A fixed rate mortgage will have an interest rate that remains the same for a certain period of time. This amount of time will vary depending on the lender but it is normally several years, perhaps up to five or maybe even ten years. During this period of time the borrower will always make the same repayments and the amount will not vary. It is likely though, that they will be tied in to this rate, meaning that they will not be able to switch to a different mortgage with the same lender or to a different lender or if they can, they will have to pay a penalty to be able to do so.

Features of a Variable Rate Mortgage

A variable rate mortgage has an interest rate that can change. The lender can generally change it as they please, although they will tend to only change it on occasion. Often, they will change it in line with the Bank of England changes to the base rate of interest, but they may choose to not follow that lead and change it at other times. This means that you do not know exactly how much you will be paying month to month and that could lead to you not having that stability of knowing exactly how much you will need to pay.

Who Should Pick Which?

If you have a very tight budget and know that if your interest payments go up you would not be able to afford them, then a fixed rate could be a good idea. You will be protected against rate increases and this means that you would be much more likely to be able to afford your repayments. However, you will be tied in and so if rates fall, then you will not be able to take advantage of this and therefore if rates are high and likely to fall, you might want to think hard about this. Consider whether there are things that you might be able to do if you had to pay more and if you feel you could cope, then it could be worth going with the variable. It is worth remembering that you can swap from a variable rate mortgage and so if you find it too expensive you might be able to get a cheaper one or switch to a fixed. Switching does cost money though, so bear that in mind too.

If you can afford to pay a bit more, then it will be less of risk to take out a variable rate. If you do end up having to pay more, you will have the money available to do so but if the rate goes down then you will benefit from that. Do calculate how much it might go up though and then you can work out whether you think that you will be able to afford those increases. It is hard to guess but if you try different levels of interest and work out what you would be paying each month, you will be able to have an idea of what you might expect to have to pay. Check your household accounts carefully to make sure that you will be able to afford larger repayments and also think about whether there might be changes that you could make that could help you to be able to afford them even if you have other expenses that increase at the same time. Remember, if you have any loans or ca credit card or overdraft those will go up as well.

What is a Tracker Mortgage?

There are lots of differences between mortgages and it can be a good idea to have a good understanding of them if you have a mortgage already or if you are thinking of getting one. Then when you choose a mortgage or if you are thinking of changing your mortgage, you will have a good idea of what the different mortgage types are so that you can make a good choice when you are picking your mortgage. You may have heard of some of the differences, particularly if you have a mortgage already, but there are lot of people that do not know what a tracker mortgage is. It can be a really important thing to know as it could be just the right type of mortgage for you.

What is a Tracker?

A tracker is a mortgage which has a variable interest rate but also with a fixed part. This sounds confusing but basically the lender will charge you a fixed amount during the course of the loan. They will also add on the Bank of England base rate to that which is the variable part. This will ‘track’ the base rate, meaning that it will change when the base rate changes. The base rate if the Bank of England interest rate and they assess this each month. It can potentially change monthly, but generally it does not change every month. At the moment the government have set the Bank of England a task to keep inflation at around 2% and using various methods including altering the base rate to do that. If inflation goes too high, they will bring up interest rates so that people can’t afford to borrow as much and will therefore spend less and bring prices down due to a lowered demand for goods and services and if inflation grow too slowly they will reduce interest rates to encourage borrowing and spending. Lower interest rates also discourage saving as people will not bother to save their money if they do not get much interest but will save if they can get lots of interest.

When is it Useful?

So a tracker is useful in several ways. When the interest rate goes down, the interest you pay will fall when you have a tracker – that is guaranteed. However, if you have other types of mortgage then this will not be guaranteed. It is possible that if you have a variable rate then the lender will bring it down but they do not have so they may not do it. If you have a fixed rate then the rate will never change as it is always fixed at the same level.

If you predict that rates will fall, then this is a great time to get a tracker mortgage. However, predicting rates is not easy. Even expert economists get it wrong and this is because the economy is not always predictable. If England was in a bubble then it would be easier, but our economy gets impacted by world events as well events happening in England and so this can make it harder to know what might happen. No one tends to predict when market crashes will occur and we have had problems with banks, leaving the EU, a pandemic and lots of other things over the years that have had an impact on the economy which has an effect on spending which them impacts interest rates. It can be very difficult to guess what might happen.

If rates are low, then you might guess that they can only go up and perhaps a tracker will not be the best to get and if rates are high you might think they are more likely to drop and so it might be a better time for a tracker. This seems sensible but lately we have had historically low rates for a very long time and then they dropped even lower, so it just shows that even if things seem predictable it is not that easy.