Fixed Rate Mortgages
A fixed rate mortgage means that the interest will remain the same throughout the introductory term of the mortgage deal this period is typically between 2 and 5 years after which you will usually revert back to your lenders Standard Variable Rate which tends to be higher. Commonly, with such a product, if you will be charged ERC’S (Early Repayment Charges) if you decide to repay your mortgage within the introductory period.
Advantages of a Fixed Rate Mortgage
With a fixed rate deal your mortgage interest repayments will remain the same throughout the initial period of the loan even if the general level of interest rates do rise which makes this product great for budgeting and planning ahead.
Disadvantages of a Fixed Rate Deal
You will be tied to this rate for the length of the deal so if the general level of interest rates were to fall you would not be able to take advantage of the reduced rates. If you want to get out of the mortgage early (as defined in your mortgage terms & conditions), you will normally be charged an erc which will vary from lender to lender but can often be thousands of pounds.
Tracker Rate Mortgages
Tracker Mortgages will be linked to an index such as the Bank of England base interest rate which could move both up or down, therefore if the base rate was to change your monthly payments would change too.
Tracker mortgages are also available over different terms and introductory rates are usually applied between 2 and 5 years just like fixed-rate mortgages you will also normally be charged an early repayment charge if you choose to repay your mortgage early (as defined in your mortgage terms & conditions).
Advantages of a Tracker Rate Mortgage
Currently (October 2017) the rates on tracker mortgages tend to be slightly lower than they are on fixed-rate mortgage products (although this can change with market conditions).
Disadvantages of a Tracker Rate Mortgage
A tracker rate mortgage will not provide you with the same security as a fixed rate mortgage, this is because the rate is variable. You have to be aware that your mortgage payments could both rise or fall and it is important to make sure that you will still be able to make your mortgage payments if this happens.
Tracker Mortgages are not the only type of variable rate mortgage available on today’s competitive mortgage market, discount mortgages work in a similar way as tracker mortgages however the interest rate is not linked to the Bank of England’s base rate it is instead linked to your lenders Standard Variable Rate, your initial mortgage rate will be set at an agreed percentage beneath your lenders standard variable rate and will either rise or fall in line with it.
It’s worth keeping in mind your lender can raise their Standard Variable Rate even though the base rate has not changed.
Discount mortgages are available over a variety of different terms typically between 2 and 5 years, always remember if you decide to leave your mortgage deal before the introductory term is over you will most likely be charged an exit fee which could be thousands of pounds.
Advantages of a Discount Mortgage
Just like tracker mortgages, the rates available on discount mortgages tend to be lower than they would on a fixed rate deal (although this can change with market conditions) and because the interest rate is variable if your lender’s current Standard Variable Rate were to fall your monthly payments would reduce as well.
Disadvantages of a Discount Mortgage
Discount mortgage rates are linked to your lenders Standard Variable Rate, not to the Bank of England base rate. This means that in theory, your lender could increase interest rates at any time even if the Bank of England Base rate has not changed. This means that those who are struggling to make ends meet could struggle to budget effectively on a discount Mortgage.