Should you take a fixed or variable rate mortgage? (and what’s the difference?)
As we all know, price of everything is going up; utilities, food, fuel, travel and any decent mortgage broker will tell you, mortgage rates are no exception. If your mortgage rate is coming to an end, as so many are in 2023, you need to make your next mortgage decision – should you fix a rate or take a tracker mortgage? Over the past few years, we have all become comfortable with mortgage rates being at a low level and there has traditionally been some cautiousness towards tracker mortgages. But now that fixed rates are rising and tracker mortgages are not rising as steeply, they have become more appealing to many of my clients. As we navigate our way through this cost-of-living crisis, here are the facts about fixed rate and tracker mortgages to help you make your next mortgage decision.
Fixed rate – the good
A fixed rate mortgage is fixed for a specified number of years, so your monthly payments will not change
Great for long term budgeting
Ideal if you cannot afford for your mortgage payment to suddenly increase without much warning
Influenced by swap rates and not automatically influenced by the bank of England base
You can choose the term; typically 2/5/10 years.
Fixed rate – the bad
When your fixed rate finishes you go on to the lender’s standard variable rate, which is usually higher. You will need to organise your next mortgage before the end date to avoid this.
Rates have gone up in a short space of time so now it will generally cost you more per month.
There are penalties for both overpaying and coming away early, which can potentially make moving house before your rate comes to an end expensive.
Fixed rate – the ugly
You would not benefit if mortgage rates came down within the term of your fixed rate, unless you felt it was worth paying the penalty to come away early!
Variable rate tracker – the good
It ‘tracks’ the Bank of England base rate so your monthly payment is lower if the base rate decreases
Currently* a 2-year base rate tracker is lower than a fixed rate mortgage and so it can make a BIG difference in monthly payments
Several high street lenders offer no penalty for coming away from a tracker, which is great if you later decide to fix, move house or pay off your mortgage.
It’s considered a more flexible option if you do not want to commit to a long-term plan.
Variable rate tracker – the bad
No one can ever truly predict what will happen to the Bank of England base rate, so it brings a level of uncertainty to your finances.
If you can’t afford to pay any more on your monthly payment, then it is not a great option for you.
Some still have a penalty for overpaying and coming away early so you need to choose wisely when opting for a tracker.
Variable rate tracker – the ugly
If the Bank of England suddenly sharply increases so will your mortgage payment with very little notice.
I always explain to my clients that the way to decide if a fixed rate or a variable tracker mortgage is right for you is to consider your attitude to risk, which no one can decide for you. Would you feel safer knowing exactly what your monthly mortgage payment was going to be for the next 3 years even if rates go down within that time and missing out on a potential saving? Or would you rather take a tracker mortgage knowing that you could save initially but risk the Bank of England base rate increasing and then subsequently your mortgage payment increasing too?
If you would like some advice on how to navigate your way through your next mortgage decision and calculate potential savings, then get in touch with us on 0300 981300 or email us on firstname.lastname@example.org and we would be delighted to chat through you options.