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Your Mortgage Options: Fixed Rate, Tracker and Standard Variable
Date: September 28, 2016
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If you have been looking into getting a mortgage, or if you already own one, there are two types of mortgages you will have come across – fixed rate and variable/tracker mortgages. Now, getting a mortgage will likely be the most expensive investment you have ever made and so it’s crucial that you understand which type fits you and your circumstances the best. Understanding the key difference between the three mortgage options on offer, is vital to deciding which one is best for you.
First let’s look at standard variable rates, these are the rates people find themselves on after their fixed rate has ended, if they haven’t looked into re-mortgaging and finding a great fixed rate deal with another lender. While some lenders may hold it just above the Bank of England’s base rate, most lenders will fix their own rate and will increase it as it sees fit. If you are stuck on an SVR you may be missing out on securing cheap deals on a fixed rate tight now – there is no guarantee your SVR rate won’t increase at any time and fixed rate deals may also change in the near future. To find out if there is a great fixed rate deal available for your mortgage right now simply give us a call on 01642-318419.
Fixed rate mortgages are essentially when a lender gives you a great short-term rate in return for you signing up to a long-term mortgage. In this scenario, whether or not market interest rates fluctuate, your short-term interest rate will remain the same for the duration specified. So if you’re on a 25 year mortgage with a three year fixed rate of 2%, in those three years interest rates may go up to 8% but you’ll still only be paying 2%, as agreed with your lender. This is great for short-term security and stability as you will know exactly what you will be paying rather than depending on a fluctuating market, meaning you can budget accordingly.
Now the cons of a fixed rate mortgage are that you won’t benefit from any drop in interest rates in those fixed rate years and if you want to move to another lender in those years there will likely be a penalty. Some lenders tend to also charge a high starting fee on lower fixed rates so you must balance these costs against the financial benefits over a period of years, taking into consideration your circumstances. For example, a family on a tight budget is generally better off on a longer fixed rate period, whereas a young couple with expendable income may be better off taking the chance that interest rates may drop but forgoing the certainty a fixed rate offers.
With tracker mortgages you have no fixed interest rate, this depends on the Bank of England’s base rate, meaning your interest rate can drop or increase. Tracker mortgages can work very well in times when interest rates are falling or already very low, meaning you will have to pay less interest. However with this option it is so important to bear in mind that there is a lack of certainty which may not fit with your life or your family’s. For example if you have a tight budget, can you really risk unknown, high interest rates? Right now the base rate is 0.5% but relying on a moveable rate means risking rising interest rates and forgoing certainty – some may be in a position to do this, others may not and the base rate will undoubtedly go up at some point. It’s so important individuals look at their personal circumstances and assess the best route for them and their families – which is what we at Fresh Approach do for our clients.
If you’d like to have an informal chat about the best option for you, one of our advisors will be happy to speak to you on 01642-318419



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