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Stick or twist? Choosing between fixed and tracker mortgages

04th June 2018

Unless you’re thinking of buying a tropical island, a mortgage is likely to be the most significant financial investment you’ll make in your life. Careful planning often goes into picking the right location, kind of house and budget, however, there’s one thing that’s often difficult to plan for – the future. Depending on your position, a fixed or tracker mortgage might be the right option for you, allowing you to choose a payment structure that works, no matter what tomorrow holds in store.


Fixed rate mortgages  


Simply put, a fixed mortgage is exactly that – fixed. This means that no matter what, the amount you pay in monthly fees and interest stays the same for an agreed period of time. Generally, these periods of fixed payment last from 2 to 5 years, although it’s becoming more common for lenders to offer 10-year options. Take note though, the longer the term, the higher the interest rates tend to be.


For peace of mind these mortgages are ideal, meaning that you know exactly how much you’ll be paying out at the end of each month. This makes them the mortgage of choice for those that need a guarantee of stability, as well as risk-averse budgeters. The downside to these mortgages is the fact that once you’re in, you’re locked into the rate for good. This helps in protecting from raises in rates in the wider market but means that you’ll also miss out on the savings that any reductions mean.


An important consideration is whether you’re planning to stick around for the long term. Some fixed-rate mortgages are portable but moving home can often result in large exit fees if the move occurs before the end of the agreed payment period. If in doubt about the portability of your mortgage it’s worth discussing options with your lender as often the final decision is at their discretion.


Tracker (variable) mortgages


On the other side of the coin, a tracker mortgage is one that tracks the bank of England base rate and adjusts the amount you’re required to pay accordingly. Normally this is set at a fixed margin, such one percent above or below the base rate, meaning that not all tracker mortgages are created equal. However, getting hold of a decent package, while interest rates are low, means that borrowers can often pay less than if they were to simply take out a fixed-rate mortgage. Once the deal ends there’s a high chance your lender will transfer you onto its own standard variable rate (SVR), normally with a higher interest rate.


While the savings can be substantial over the long term, it’s important to factor in the unpredictability of the economy. A rise in the base rate means a rise in the amount you’re liable to pay each month as well. With this in mind, a tracker mortgage should only really be taken out if you have security in the form of a financial cushion, just in case. An additional benefit is the ability to overpay when rates are low, this means that if conditions are right, you could pay off your mortgage in a shorter period of time. Bear in mind that, like a fixed-rate deal, fees can be incurred for early withdrawal during the agreed period.


Which one is better?


As with all mortgages, there is no size that fits all. The mortgage that suits you might not be the best option for your next door neighbour, likewise their neighbour. It all depends on personal circumstance, financial stability and what you’re willing to risk. Generally speaking, fixed-rate mortgages are the safer option, making them great for those without substantial savings to fall back on. Meanwhile, tracker mortgages can save you money but this comes without a guarantee. At IMC we know the choice can be confusing, daunting even, which is why we have a dedicated team of mortgage experts available throughout the week – just ready to impart their wisdom. If you want to chat we’re more than happy to discuss the options available to you, just get in touch!

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