Which Mortgage Rate Is Right for You? Fixed vs Variable vs Tracker
Whether you’re planning to buy your first home, switch to a new deal, or consider a remortgage, navigating the world of mortgages can feel overwhelming. Fixed-rate, variable-rate, and tracker mortgages are some of the most common options available. Each caters to different financial needs, offering specific benefits and challenges.
But how do you determine the right choice for you? Understanding how each type works and their key differences will help you align your decision with your financial goals.
Understanding your financial situation before choosing a mortgage
Before exploring the specifics of mortgage types, it’s essential to step back and assess your financial health. A thorough understanding of your budget, goals, and long-term plans will enable you to make the right choice.
Ask yourself these important questions:
- What can I afford each month? Your mortgage repayment should fit comfortably within your monthly budget. Factor in other expenses, including home insurance, utilities, and maintenance.
- Do I have an emergency fund? Consider whether you have savings to cover unexpected expenses or increases in your mortgage payments.
- What are my future plans? If you plan to relocate within a few years, a short-term deal or a more flexible option, such as a variable mortgage, might be more suitable.
- How secure is my income? If your income is stable and predictable, you might consider variable or tracker rates. However, a fixed-rate mortgage offers peace of mind in case of any uncertainty.
Assessing your financial situation will provide a foundation for selecting a mortgage that meets your needs.
What is a fixed-rate mortgage?
A fixed-rate mortgage offers predictable stability. With this type of mortgage, the interest rate is locked in for an agreed period, often spanning two, five, or even ten years. During this term, your monthly payments remain unchanged, regardless of what happens to wider economic factors like the Bank of England base rate or market conditions.
For example, if you secure a five-year fixed-rate mortgage at 4% interest, you’ll pay the same amount every month for those five years. This predictability makes fixed-rate deals popular among first-time buyers or those who prefer the security of knowing exactly how much they’ll pay each month.
What happens after the fixed term ends?
Once the fixed term finishes, your mortgage loan typically reverts to the lender’s Standard Variable Rate (SVR). The SVR could be significantly higher than competitive market rates, meaning your monthly payments could rise sharply.
For instance, suppose you had a fixed-rate term of 3%. If your lender’s SVR sits at 6%, your payments could double overnight. To avoid this scenario, many homeowners plan ahead and remortgage to a new deal just before their fixed term expires.
How do variable rate mortgages work?
Unlike fixed-rate mortgages, variable-rate mortgages feature an interest rate that can fluctuate. This means that your payments may increase or decrease during the loan term, depending on your lender’s selected rate. These changes often reflect broader economic factors, such as the Bank of England base rate.
The Standard Variable Rate mentioned earlier is the most common type of variable mortgage. However, because SVR rates are controlled at the lender’s discretion, monthly payments can quickly increase if rates rise.
Flexibility or unpredictability?
Variable rate mortgages often offer added flexibility, such as lower early repayment fees compared to fixed-rate mortgages. If you plan to overpay on your mortgage or relocate within a few years, this flexibility can provide a significant advantage.
On the flip side, variability can be stressful. If rates increase unexpectedly, your monthly payments may rise sharply, potentially putting a strain on your budget.
What sets tracker mortgages apart?
A tracker mortgage operates as a specific type of variable mortgage. Instead of being set directly by the lender, a tracker “tracks” an external benchmark, usually the Bank of England base rate.
For example, if your tracker deal is set at “Base Rate + 1%”, and the base rate is 5%, your mortgage rate will total 6%. If the base rate decreases to 4.5%, your rate will drop to 5.5%.
Example: Imagine two homeowners with similar properties and a £200,000 loan:
- The first homeowner opts for a two-year fixed rate at 4%, paying £1,055 per month, or £25,320 over 24 months. Their payments remain unaffected even if the base rate rises to 5%.
- The second homeowner chooses a tracker mortgage tied to “Base Rate + 1%”. With a starting base rate of 4%, they initially pay £1,000 monthly. If the base rate rises to 5%, their payments increase to £1,166 for the rest of the term.
While tracker mortgages offer transparency and the potential to save when interest rates fall, they also carry the risk of increasing costs.
Tips for comparing mortgage deals
When comparing mortgage options, it’s important to look beyond the headline interest rate.
Here’s what to keep in mind:
- Look at the APRC (Annual Percentage Rate of Charge): This shows the total cost of the mortgage, including fees, over its full term.
- Consider arrangement fees: Some lenders charge high upfront fees for certain deals, which could offset any savings from a slightly lower interest rate.
- Check early repayment fees: If you’re likely to repay your mortgage early or remortgage, avoid deals with high early repayment charges.
- Review flexibility options: Can you overpay without penalties? This feature can help you save on interest in the long term.
The role of a professional mortgage broker
Mortgage brokers can help simplify the process of finding the right deal for your situation. They have access to a variety of products and can guide you based on your individual needs.
Why use a mortgage broker?
- Expertise: Your broker will explain the fine print and complex terms.
- Access to better deals: Some brokers have access to exclusive mortgage products that are not available directly to the public.
- Time-saving: A good broker does the legwork of comparing deals, so you don’t have to.
- Tailored advice: They’ll recommend products based on your specific financial circumstances and future plans.
Common mistakes to avoid
When selecting a mortgage, these errors can cost you time, stress, and money:
- Focusing only on the interest rate: Don’t ignore fees, flexibility, or repayment terms.
- Ignoring the SVR: Failing to plan for what happens after your initial term could lead to much higher monthly payments.
- Not budgeting for rate increases: Tracker and variable rates offer savings when rates fall, but make sure you can afford payments if rates rise.
- Skimping on research: Relying on a single lender instead of shopping around could mean missing out on better deals.
- Overstretching your budget: Your monthly payments should be affordable now and in the future. Avoid stretching yourself too thin.
Final thoughts
Choosing the right mortgage takes time and careful consideration, but it doesn’t have to be overwhelming. By understanding your financial situation, comparing options, and consulting with a professional mortgage broker, you can make a confident decision that aligns with your goals.
Whether you prioritise the stability of a fixed-rate deal, the potential savings of a variable rate, or the transparency of a tracker mortgage, the right choice comes down to what works best for you and your financial future.
Time to choose the right mortgage with confidence?
Deciding on the right mortgage doesn’t have to be a guesswork process. Whether you prefer fixed, variable or tracker rates, getting professional advice will help you understand the long-term impact of your choice. Contact us today to get started or find out more. Speak to Fitch & Fitch, telephone 020 7859 4098, or email info@fitchandfitch.co.uk.