Fixed-rate or tracker mortgage?
Following the Bank of England’s base rate cut to 3%, deciding between a fixed-rate mortgage and a tracker mortgage has become even more difficult than it used to be. Choosing one or the other could potentially save you (or cost you) a lot of money in the long-run.
But which is the better choice in the current mortgage market? The answer is either – depending on your own situation, and how much of a risk you are willing to take.
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Tracker mortgage
The interest rate on a tracker mortgage will always be set at a pre-agreed margin above base rate. For example, if the base rate is 3% and your tracker mortgage is set at 1.5% above base rate, you would pay 4.5% interest on your mortgage.
When the base rate is low, tracker mortgages can offer great value. At first, they are typically cheaper than fixed-rate mortgages (since they do not have to compensate for any potential increase in the base rate).
However, the downside of this is that if the base rate goes up, so do your mortgage payments. If your interest rate goes up by one or two percent, the increase in your monthly payments can be larger than you may think.
Currently, tracker mortgages may seem an attractive option – the base rate is at its lowest since 1955, and most economists anticipate further cuts to as low as 1% in 2009. In the short-term, at least, it looks as though tracker mortgages are probably the cheapest option.
However, be aware: if market conditions change unexpectedly, so could your interest rate. Not only that, but a number of lenders have raised the interest rate margins on their tracker mortgages – meaning that in many cases, tracker mortgages are in fact no cheaper than they were when the base rate was higher.
Fixed-rate mortgage
As the name suggests, fixed-rate mortgages carry the same interest rate for an agreed period of time. These fixed-rate periods usually last for two, three or five years, but some lenders will offer fixed-rate mortgages for as much as 15 or even 25 years.
Fixed-rate mortgages offer security. At first, they will usually be a little more expensive than equivalent tracker mortgages, but think of the additional interest as insurance: you know that even if the base rate shoots up, your monthly mortgage payments will remain exactly the same – saving you money.
However, this security comes at a price. Most fixed-rate mortgages come with a mortgage arrangement fee, and these have become more expensive in recent months.
Of course, if the base rate stays low throughout the duration of your mortgage, you may well end up spending more than if you had chosen a tracker mortgage.
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