Fixed rate or tracker mortgage - which should one go for?
When it comes to choosing the type of interest for your mortgage one always wonders what would be the best option for them. There is no straightforward answer to this question and it depends on many parameters. This article aims to help you understand the implications and make an informed choice.
There are a lot of your own needs and circumstances that determine what type of interest rate is better for you as well as market factors which determine which interest rate type you should go for.
Your view of the Base rate
- This is perhaps a very important parameter.
If you think the base rate will go up
then you might as well be on the fixed
interest rate and if you think the rates
will remain where they are or will go
down you might be better off on a tracker.
As a mortgage professional I am often
asked the question of what I think will
happen to the Base rate - no matter
what I think the truth remains that
my guess is only as good as yours.
Size of the mortgage
- if the amount borrowed is significantly
higher and you chose a tracker mortgage
and in this event if the Base rate goes
higher the amount you need to pay extra
each month will become significantly
higher and because of this those with
a large mortgage may like the comfort
of a fixed mortgage
Comparing the best of both types
- Irrespective of what interest rate
type you decide to take its always best
to compare the best rates available
on a fixed basis as well as those available
on a tracker. The banks are usually
smarter than the customers. They price
the interest rates smartly. For instance
when this article is written the bank
of England Base rate is 0.5% and the
banks offer tracker rates that are at
least 1% cheaper than the fixed rates.
For instance if in your circumstances
the best tracker rate is 3.29% the best
fixed rate is 4.39% Under these circumstances
you have to work out the monthly payments
on both these options and see if you
want to pay a bit higher and have the
peace of mind or don't mind risking
slightly higher future payments. While
it might be tempting to just compare
rates as of today when the base rate
is 0.5% you will also have to work out
what happens if base rate increases
say by 1% or more
Flexibility in your monthly
cash flow: If you are working
on a tight monthly cash flow and there
is not lot of cushion there, you might
be better off taking a fixed rate mortgage
because that gives you the confidence
in your budgeting. Lot of people say
they prefer a tracker mortgage because
the slightly lower outgoings would be
easier on their monthly cash flow, but
the truth is if you cant afford the
fixed rate today you can certainly not
risk taking the tracker rate which will
increase in line with the base rate.
More than 1 mortgage: if
you are either a landlord or have more
than 1 mortgage then you might want
to consider spreading your risk by having
some on fixed and some on tracker this
is better unless you are very confident
of what would happen to the base rate.
Several clients who have let out their
previous property and bought a new property
for them to live in would be better
off keeping 1 on tracker and 1 on fixed
- thereby spreading your risk
In summary:
Fixed rate could be more expensive but less risky. If you think the base rates will go up or want certainty in monthly outflow or have a large mortgage balance you may be better off with the fixed rate.
Tracker rate could be less expensive but more risky. If you think the base rate will not go up drastically and would like to benefit from the base rate being low and don't have a large mortgage you may be better off with a tracker mortgage but only after you have understood the implications of changes in base rate and whether you can afford it even when base rate goes up.
Your home may be repossessed if you do
not keep up repayments on your mortgage.
Sekkappan Alagu trading as Nachu Finance is an
appointed representative of The Whitechurch Network
Limited which is authorised and regulated by the
Financial Services Authority. We do not usually
charge a fee for mortgage advice. However you
do have the option to pay a fee of 0.80% of the
loan value and The Financial Services Authority
may not regulate all products or services on this
website
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