Choosing the best mortgage can be a difficult task. Much depends on your individual circumstances and attitude to risk. Whether you opt for a fixed rate or a tracker you are taking a gamble: fix too early and you can end up paying more if interest rates go down, opt for a tracker and repayments can increase sharply if interest rates rise significantly.
Fixed rate mortgages are the most popular choice. Here the interest rate payable is set for a fixed period, usually between two and five years. At the end of the fix you revert to the lender`s standard variable rate.
The main benefit of fixed rate mortgages is the certainty of cost. Monthly repayments are the same throughout the term of the fix making budgeting easier. This is especially attractive to first time buyers, those who are stretching themselves to buy a property and those who are not expecting any significant increase in their income in the short term.
There are, however, a number of disadvantages to fixed rate mortgages. This security of monthly cost comes at a price and the interest rate payable for fixed rates is not usually the most competitive on the market. Fixed rate mortgages also usually attract higher arrangement fees than the alternatives. Borrowers are essentially locked into the mortgage for the term of the fix as there are usually hefty penalty fees to exit. Whilst this can be a good thing if interest rates rise higher than the fixed rate, it can mean paying much more than the lender`s standard variable rate in the event that interest rates fall.
Unlike fixed rate mortgages, the interest payable under a tracker mortgage varies over time. Tracker mortgages follow the Bank of England Base Rate, which is set by the Monetary Policy Committee of England on a monthly basis. Tracker mortgages are not set at the same rate as the Base Rate but are usually a percentage point above it, for example, Base Rate + 1.5%.
Tracker rates have become increasingly popular in recent years due to the low Base Rate. Initial rates are usually more attractive than fixed rates and arrangement fees are generally lower. Unlike fixed rate mortgages, tracker mortgages are available for the full lifetime of the mortgage as well as for shorter terms.
Tracker mortgages have their down sides too, however. Whilst they generally have cheaper initial payments than a fixed rate, borrowers will be exposed to interest rate increases at some point so should expect repayments to rise in the future. This may not be a concern for those with a high level of disposable income, however, it can have a very real impact for those who cannot afford increased repayments. Additionally, some lenders apply a tracker "collar" whereby they reserve the right to stop tracking if the Base Rate falls below a minimum amount, meaning that borrowers do not necessarily feel the full benefit of Base Rate falls.
Whichever type of mortgage you opt for, the key issue will always be affordability. The easiest way to evaluate the options is to use a mortgage cost calculator to work out what the monthly repayments will be on the interest rates currently available in the market. It is also possible to calculate what future repayments would be if interest rates were to rise, helping to assess the future affordability of a mortgage.