Whilst a family can benefit from the certainty of a fixed interest rate mortgage, a tracker loan is effective when economic growth and inflationary pressures are minimal. The best fixed rate mortgage loan involves economists using their experience and know-how to predict future base rate movements. This means that they will attempt to factor-in the likelihood of a rate rise further down-the-line so the amount paid will almost certainly be higher in the short term. It is all very subjective and costly mistakes can and will happen.
End of a Mortgage Deal is an Opportunity to Save Money
Once a fixed term concludes, the loan switches to Standard Variable Rate (SVR). This works in a similar way to a tracker loan, but the lender margin will be higher. At this stage, it is possible to get a remortgage without having to pay an early redemption penalty. A penalty is paid when the customer wishes to pay off or move their loan to a new provider before the end of the pre-specified term. This is to cover any expenses and costs incurred by the lender. Customers typically move their loan six or more times to secure the best mortgage deal before the loan is completely paid off.
How Fixed Rate Mortgage and Tracker Loan Deals Work
- A fixed mortgage involves paying a specific rate of interest over the next x years. For example, a £100,000 repayment loan at 4.5% over 25 years means a homeowner will need to make a monthly mortgage repayment of £561.99. This won't change until the end of the fixed term even if monetary policy changes.
- A base rate tracker mortgage will, subject to a 1% to 2% margin, follow the rate of interest that is set by the Bank of England. The margin represents a profit for the lender. Any upward or downward movement in the rate of interest will result in a fall or rise in monthly mortgage payments. When rates are low, monthly repayments often start off as more affordable. As the economy starts to recover, the cost of borrowing can rise quite dramatically.
Advantages and Disadvantages of Base Rate Tracker Mortgages
A base rate tracker mortgage helps homeowners when interest rates are starting to fall due to a general cooling-off of the economy. A fixed mortgage would have meant that the borrower has to maintain higher repayments, despite a sudden change of policy that leads to falling central bank base rates. Predict monetary policy incorrectly and rising repayments will start to consume a higher percentage of disposable income.
Pros and Cons of Cheap Fixed Rate Mortgages
Neither interest rates or loan repayments will change, no matter what the Bank of England decides to do to combat inflationary pressures. This is particularly beneficial to fixed income families who are vulnerable to a sudden upward movement in repayments. Household budgeting will be a lot easier. Fix rates when they are relatively high and the borrower fails to benefit from reduced payments as interest rates start to fall.
Fixed Interest Rate Mortgage vs Tracker Mortgage Deals
Whether a fixed mortgage or base rate tracker is the better option will depend heavily upon the direction of Bank of England monetary policy. Whilst interest rates are unlikely to go any lower, it could take time for the economy to recover. Fixed rate mortgage deals factor-in the likelihood of a series of rates rises based on an economic recovery. If this doesn't happen as soon as expected, a tracker loan could still the borrower save money. There is no substitute for determining the direction of the economy and interest rate movements.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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