Fixed-rate vs tracker mortgage. What’s the difference?

What is a fixed-rate mortgage?

A fixed-rate mortgage has an interest rate that remains unchanged for an agreed period, commonly two or five years. During this period, your contractual monthly repayments will normally remain the same, making it easier to plan your household budget.

For example, if you arrange a five-year fixed-rate mortgage at 4.5%, your interest rate will remain at 4.5% throughout those five years. However, if market interest rates fall during your fixed-rate period, you won’t automatically benefit from the reduction.

What is a variable-rate mortgage?

A variable-rate mortgage has an interest rate that can increase or decrease over time. This means your monthly mortgage repayments may change depending on the type of variable-rate product and the lender’s terms.

Variable-rate mortgages include tracker mortgages, discounted variable-rate mortgages and standard variable rate (SVR) mortgages. Unlike a fixed-rate mortgage, a variable-rate mortgage doesn’t provide the same certainty over future repayments.

What is a tracker mortgage?

A tracker mortgage is a type of variable-rate mortgage that follows a specified benchmark, usually the Bank of England base rate. For example, a tracker mortgage might charge the Bank of England base rate plus 1%.

If the base rate is 4%, your mortgage interest rate would be 5%. If the base rate falls to 3.5%, your mortgage rate would normally fall to 4.5%, subject to the mortgage terms.

However, if the base rate rises, your mortgage interest rate and monthly repayments could also increase. Some tracker mortgages include minimum interest rates or other restrictions.

What is the difference between a tracker mortgage and a standard variable rate?

A tracker mortgage normally follows a specific benchmark, such as the Bank of England base rate, by an agreed margin. A standard variable rate (SVR), however, is set by the mortgage lender.

Although lenders may consider changes to the base rate when adjusting their SVR, they aren’t necessarily required to increase or decrease it by the same amount. SVRs are often higher than introductory mortgage rates, although this isn’t always the case.

Is a fixed-rate mortgage safer than a tracker mortgage?

A fixed-rate mortgage provides greater certainty over your interest rate and contractual repayments during the fixed period. This can be particularly useful if you have a tight household budget or prefer predictable monthly expenses.

A tracker mortgage introduces the possibility of changing repayments. You could benefit if the tracked rate falls, but you may pay more if it rises. Neither option is automatically better for everyone. The most suitable choice depends on your circumstances and ability to manage changes in mortgage costs.

What happens if interest rates fall during my mortgage?

If you have a tracker mortgage linked to the Bank of England base rate, your mortgage rate will normally decrease when the base rate falls, subject to your policy terms. If you have a fixed-rate mortgage, your interest rate won’t change during the fixed period.

If you’re on your lender’s standard variable rate, the lender may reduce its rate, but this isn’t guaranteed. It’s important to remember that changes to the Bank of England base rate don’t always translate directly into equivalent changes in every mortgage product.

What happens if interest rates rise?

If you have a fixed-rate mortgage, your interest rate normally remains unchanged until your fixed deal ends. If you have a tracker mortgage, an increase in the benchmark rate will normally increase your mortgage interest rate.

For other variable-rate mortgages, your lender may increase its interest rate in accordance with the product terms. Higher interest rates can increase monthly repayments and the overall cost of borrowing.

Is a two-year or five-year fixed mortgage better?

A two-year fixed-rate mortgage provides interest rate certainty for a shorter period, allowing you to review your options sooner. A five-year fixed-rate mortgage offers longer-term certainty, which may appeal if you prefer stable repayments.

However, longer fixed-rate periods can be less flexible if you expect to move home, repay your mortgage or change your borrowing arrangements. The best option depends on the available rates, product fees, early repayment charges and your future plans.

Can I switch from a fixed-rate mortgage to a tracker mortgage?

Yes, but switching during an existing fixed-rate period could result in an early repayment charge. If your fixed-rate deal is approaching its end, you can review tracker, fixed and other mortgage options before deciding what to do next.

Some lenders allow you to secure a new mortgage deal several months before your existing arrangement expires. A mortgage adviser can help you compare the costs and implications of switching.

Which is better: a fixed-rate or tracker mortgage?

A fixed-rate mortgage may be more suitable if you value predictable monthly repayments, while a tracker mortgage may appeal if you’re comfortable with interest rate changes and want the possibility of benefiting from falling rates.

However, choosing a mortgage shouldn’t depend solely on predictions about future interest rates.

You should also consider:

• Your monthly budget and financial commitments.

• How comfortably you could afford higher repayments.

• The mortgage rate and any arrangement fees.

• Early repayment charges and overpayment allowances.

• Whether you expect to move home or remortgage soon.

At GHL Direct, our mortgage advisers can compare suitable fixed-rate, tracker and variable-rate mortgages from our panel of more than 50 UK lenders.

Not sure which mortgage rate is right for you? Speak to a GHL Direct mortgage adviser and explore the options available for your circumstances.