A tracker mortgage basically gives you the option to follow the Bank of England base rate movements, plus a margin, for example, +1%, with regard to your mortgage interest rate. This means that if the BoE rate is 0.5% your mortgage interest rate will be 1.5%. This tracker feature can be for a fixed period of time or for the duration of your mortgage, depending on the mortgage deal struck.
A fixed rate mortgage deal is different; typically fixing the rate when the mortgage is taken out for a period of time, two years or five years typically, although other products are also available. Therefore, you know for the next two years or five years exactly what your mortgage payments will be. This is good if you need stability and certainty – bad if interest rates in general fall during the fixed period, because you end up paying more than you would if you had a tracker mortgage or standard variable rate deal.
One of the main advantages of a tracker mortgage according to flagstone.co.uk is the fact that if rates are extremely low, as at the current time, you can actually overpay your mortgage – that is to say, you pay more each month than the actual cost, which means that your mortgage will be paid of sooner than the original term, representing a considerable saving in terms of interest.
On the other hand, if rates do rise, so will your monthly mortgage payment, and for those on tight budgets, this could cause problems.
Deposits and fixed rates
Another important factor mentioned by flagstone.co.uk is the amount of deposit you can put down, which will greatly influence any fixed rate deal you get, or the interest rate on any mortgage product. For example, with a 40% deposit and a fee of around £1,500 there are five-year fixed-rate deals as low as 2%, while a lower fee will typically result in a slightly higher interest rate. For example, a fee of £999 gets you access to a five-year fixed-rate deal with an interest rate of 2.19%.
What about a shorter fix
Two-year fixed deals have been popular in recent years, as markets and borrowers were unsure of economic growth and the recent recession was still a fresh memory. Rates are as low as 1.14% for a fee of around £1,500 at the moment, but more and more borrowers are now considering a five-year fixed deal as it now seems certain that rates will rise in the second half of this year, so locking in now gets some of the lowest rates in many years – guaranteed for the next five years, which makes good sense.