Fixed, Variable and Tracker Mortgages

Most mortgage providers have a range of mortgages to fit various circumstances. Here we outline the types of rate on offer and in what circumstances you should consider them.

If we knew exactly when interest rates were going to change, how much they would change and the direction in which they were heading then it would be very simple to choose a particular mortgage rate. Unfortunately, this is not easy but there are some indicators that will give an insight into how interest rates may change and your own circumstances will also play a big part in deciding which mortgage rate to choose.

Personal Circumstance

Generally speaking, if you are on a tight a budget and cannot afford for interest rates to rise and increase the cost of your mortgage costs then you should consider a fixed rate over a variable rate. You may have to pay more initially but you will have peace of mind if interest rates start to increase.

Economic Indicators

Inflation has the biggest effect on interest rates. Generally speaking, if inflation increases then interest rates will also increase. Inflation occurs when the price of goods increase, this usually happens as a result of increased manufacturing costs emanating from higher fuel or wage bills or may be the result of higher demand or a shortage in supply (a good example of this is oil - demand increased as China's economy started to grow at the same time oil is a limited resource, so prices naturally increased).

Fixed Rates

The interest rate does not change for a given period of time, so you will know exactly what your repayments are going to be. Fixed rates offer stability and are the only sure way to guarantee your monthly payments won’t change. There are no reductions in payments if interest rates go down during the fixed rate period. They are a good choice if you don’t feel you have much financial leeway and need to work to a budget

Variable Rates (discounts and trackers)

TRACKER RATES: A tracker mortgage follows the Bank of England base rate at a set level, generally at a fixed percentage above the base rate. Every time the base rate changes your interest rate (and therefore your monthly payment) is adjusted in line with it. Tracker mortgages are available over a range of periods

DISCOUNT RATES: Similar to the tracker, but this rate is a true discount off the Lender’s standard variable rate for a given period. An increase in the Bank of England base rate usually leads to lenders increasing their variable rate, but this is not guaranteed. Likewise any reduction in the Bank of England rate does not necessarily mean a reduction the Lenders SVR. The borrower does, however, have an assurance that for a given period he will be paying less than the Lenders SVR.

WHICH ONE, TRACKER OR DISCOUNT?: Lenders tend not to pass on the full movement in interest rates, whether they are falling or rising. A tracker rate will always pass on 100% of a rise or fall in interest rates  while a discount rate will tend to pass on a percentage of any change in rates. Logically, when interest rates are falling you want a tracker mortgage but when interest rates are rising it is probably better to have a discount mortgage.

Capped Rates

The interest rate charged will not increase beyond a certain level but it could fall if interest rates are reduced. Initially, the interest rate will be higher than a comparable fixed rate, so if you think interest rates are set to fall but you can't afford for them to rise the this type of mortgage might be good for you.