Barring exceptional circumstances, you should definitely aim to have a mortgage in place for when your fixed rate ends. More specifically, you should aim to have the most suitable deal available to you in place for when your fixed rate ends. This may be another fixed-rate deal but it might also mean switching to a variable-rate or “tracker” mortgage.
Fixed-rate vs variable-rate mortgages
The basic difference between fixed-rate and variable-rate mortgages is fairly evident from the names. For completeness, however, with a fixed-rate mortgage, the interest rate is fixed for the a certain length of time. With a variable-rate mortgage, the interest rate is pegged to the base rate set by the Bank of England. Interest-rate mortgages rise and fall in line with this base rate. This is why they are often called tracker mortgages.
Both fixed-rate and variable-rate mortgages are very wide categories of mortgages. There are numerous variations of them. This means that choosing between a fixed-rate and a variable-rate mortgage is only a starting point for finding the right mortgage for you. It is, however, a very important first step.
Comparing the pros and cons of fixed-rate and tracker mortgages
Here is an overview of the main pros and cons of fixed-rate and tracker mortgages.
Advantages of fixed-rate mortgages
Stability and predictability: Fixed-rate mortgages offer the certainty of consistent monthly payments as the interest remains the same for a fixed time period, allowing for easier budgeting.
Protection against interest rate increases: With a fixed rate, you are shielded from rising interest rates, providing financial security.
Peace of mind: Knowing that your mortgage rate won't change offers peace of mind, especially in times of economic uncertainty.
Disadvantages of fixed-rate mortgages
Limited flexibility: Unlike tracker mortgages, fixed-rate mortgages do not adjust with interest rate changes, meaning you won't benefit if rates drop.
Potential higher initial rates: The fact that lenders know they cannot increase their rates for the length of the term can motivate them to play safe and offer higher rates to start with.
Advantages of tracker mortgages
Potential cost savings: Lenders know they can increase their rate if the Bank of England increases the base rate. This means they don’t have to worry so much about pricing in the possibility of increases in the base rate.
Flexibility: Some tracker mortgages offer the flexibility to switch to another deal or lender without incurring early repayment charges.
Disadvantages of tracker mortgages
Exposure to interest rate fluctuations: Since tracker mortgages are linked to the Bank of England Base Rate, any increase in the rate will lead to higher mortgage payments.
Uncertainty in budgeting: The variability of monthly payments with tracker mortgages can make it challenging to plan finances accurately, particularly if rates rise unexpectedly.
Factors to consider when choosing a mortgage
When choosing between a fixed rate and a tracker mortgage, there are several important factors to consider. Here are the three most important ones.
Personal financial situation and long-term plans: Evaluate your income stability and future financial prospects to determine if you can comfortably manage potential interest rate changes. Additionally, consider your long-term goals, such as whether you plan to stay in the property or if you anticipate any major life changes that may impact your mortgage.
Attitude towards risk and interest rate fluctuations: If you prefer more stability and predictability, a fixed-rate mortgage might be the better choice for you. By contrast, if you are comfortable with some level of uncertainty and believe that interest rates may decrease in the future, a tracker mortgage could offer potential cost savings.
Repayment flexibility and early repayment charges: Determine if you prefer the option to make overpayments or adjust your repayment schedule. Some mortgages offer more flexibility in this regard than others. Additionally, review the terms and conditions of the mortgage offers, specifically regarding any penalties for paying off the mortgage early.
How a mortgage broker can help
A mortgage broker can guide you through your options to help you decide which type of mortgage is right for you. Once you’ve made your decision, they can help to make it a reality by finding the right loan with the right lender.
For mortgage advice, please get in touch
Your home may be repossessed if you do not keep up repayments on your mortgage.
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