Fixed vs Tracker Mortgages: Which Is Right for You?

Your mortgage is probably the biggest monthly bill you will ever have, so the type of deal you choose matters. The good news is that most UK mortgages boil down to just a few options, and once you know how they work the choice becomes much less intimidating.

The main types of mortgage rate

Fixed-rate mortgage. Your interest rate stays the same for an agreed period, commonly two or five years. Your monthly payment does not change during that time, whatever happens to interest rates in the wider economy. This makes budgeting simple and is popular with first-time buyers.

Tracker mortgage. Your rate follows another rate, usually the Bank of England base rate, plus a set amount. If the base rate rises, your payments rise. If it falls, they fall. You get no certainty, but you also benefit when rates drop.

Standard variable rate (SVR). This is the lender's default rate, and it is what you usually move onto when a fixed or tracker deal ends. The lender can change it whenever it likes, and it is often higher than the deals on offer, so most people avoid staying on it.

The pros and cons

• Fixed: predictable payments, but you may pay a penalty (called an early repayment charge) if you leave early, and you will not benefit if rates fall.
• Tracker: can be cheaper when rates fall and sometimes has lower exit fees, but your payment can jump with little warning.
• SVR: flexible, but usually poor value.

A simple way to decide

Ask yourself one question: what would happen if my payment went up by a few hundred pounds a month? If that would cause real stress, a fixed rate is likely the safer choice. If you have plenty of spare income or savings and want flexibility, a tracker may be worth considering.

A worked example

Priya and Tom borrow £200,000. On a five-year fixed deal, their payment is the same every month, so they can plan holidays and savings with confidence. A neighbour with a tracker pays less when rates dip, but had to rework her budget when they rose. Neither choice is "wrong". They simply suit different people and different appetites for risk.

Don't forget the extras

The headline rate is only part of the story. Check for:

• Arrangement fees, which can be several hundred pounds or more.
• Early repayment charges if you want to move or overpay.
• Overpayment limits, as many deals let you overpay only up to a set amount each year.
• When the deal ends, so you can start looking for a new one a few months ahead and avoid slipping onto the SVR.

Action step

Find out when your current deal ends (or, if you are buying, how much of a payment rise you could cope with). Then compare deals from a few lenders, or speak to a whole-of-market mortgage broker, before committing.

This article is for general information only and doesn't constitute financial advice. Everyone's situation is different, and your home may be repossessed if you do not keep up repayments on your mortgage. Consider speaking to a regulated mortgage adviser before making major decisions.