Each of the 3 mortgage interest types have their own advantages and disadvantages. To make choosing your mortgage a little easier, we have compiled a short list of the pros and cons for each.
Tracker Rate – pros & cons
Tracker mortgages are directly linked to the Bank of England’s base rate and so will increase or decrease with any changes.
Pros of a Tracker Rate
- The interest rate in a tracker mortgage follows the Bank of England base rate; in a time where the base rate is low this can mean reduced monthly payments.
- Often the initial interest rate is lower than the equivalent fixed rate product.
- A tracker rate follows market trends; this can be good and bad.
- Some lenders do have the option of placing a limit on how high or low the interest rates can go, also known as a ‘cap’ and ‘collar’.
Cons of a Tracker Rate
- The interest rate on a tracker mortgage follows the Bank of England base rate; this means in times of high base rate the monthly payments will be higher.
- This type of rate can be volatile as rates can move either way. This can make budgeting much harder if the interest rate rises.
Fixed Rate – pros & cons
On a fixed rate mortgage the interest rate is fixed at the beginning of the mortgage for a predetermined amount of time; this can range from 1 to 10 years.
Pros of a Fixed Rate
- At the time of purchase, the interest rate is fixed for a predetermined duration, with no risk of this amount changing until the end of the mortgage term. This makes this rate good for budgeting as you know exactly how much you will pay each month.
- For first time buyers this can be seen as a safer option due to the monthly payments being fixed.
- Most lenders have the option to fix for as little as 1 year and up to 10 years. This can give flexibility if you need fixed out goings for a number of years. However with some lenders there is the option to fix for the entire length of the mortgage.
- If base rate does rise you can stay on your fixed rate and so potentially be saving money each month.
Cons of Fixed Rate
- Fixed rate mortgages are not known for their flexibility due to most lenders having high early repayment charges.
- If base rate does fall you could be stuck paying a higher interest rate. This means that over the fixed period you could end up paying more than if you where on either a variable rate or tracker rate equivalent.
- Some lenders will charge higher arrangement fees for a fixed rate mortgage; however these fees can be added to the mortgage balance.
- Unless you remortgage at the end of the fixed term, you will usually go onto the lenders standard variable rate (SVR), which usually means higher monthly payments
Variable Rate – pros & cons
Each variable rate is set by the individual banks. Sometimes these can be linked to the base rate, others are set independently by each bank. When you look at a variable rate it is important to look at how this rate is calculated.
Pros of a Variable Rate
- If the standard variable rate (SVR) is reduced then this will reduce your monthly payments.
- It can be easier to switch to a different mortgage product during the lifetime of the variable, as many lenders have lower or do not charge early repayment fees.
- On a variable rate mortgage the interest rate should start off lower than the lenders fixed rate equivalent, meaning lower initial payments.
- The majority of lenders do not charge arrangement fees on these types of mortgage, which you save approximately £1000 when arranging.
Cons of a Variable Rate
- If the bank standard variable rate changes this will be passed on to you in your monthly payments.
- Having variable monthly payments can make monthly budgeting much harder, especially during hard economic times.
Which Interest Rate should I go for?
There isn’t a fixed answer for this question; it is mainly down to your own circumstances.
- A fixed rate mortgage is usually considered the ‘safe’ option due to the fixed monthly payments, so you know exactly how much to budget each month.
- A tracker rate mortgage is susceptible to change, as it tracks the Bank of England’s base rate. However your mortgage will vary with the base rate.
- A variable rate mortgage is set by the bank, and the bank retains the right to change this rate, although this can be less volatile than the base rate.