After recent interest rate hikes by the Bank of England – amounting to up to 5.25% – the mortgage landscape in 2023 is rapidly shifting. Many homeowners and prospective buyers alike are left questioning what this means for their mortgages going forward, especially with higher interest rates driving up costs; it is therefore essential that consumers identify which products provide optimal rates – both fixed and tracker mortgage products alike – on today’s market.
Should I fix my mortgage?
To answer the question, “Should I fix my mortgage?”, it’s essential to understand the ins and outs of fixed-rate mortgages, among other types. In this article, we’ll delve into the realm of mortgages, with a particular focus on fixed-rate and tracker mortgages.
Whether you’re on the verge of purchasing a property or planning a remortgage, one of these mortgage types could be the ideal match for your current circumstances. It’s all about identifying what aligns best with your financial situation and future plans!
We’ll take a comprehensive look at each type of mortgage, discussing their pros and cons, and shedding light on innovative lending solutions offered by various lenders. Our goal is to equip you with the necessary information to make a well-informed decision about which mortgage type aligns with your needs in the current economic environment.
Understanding the Basics
Prior to diving deeper, it’s essential that we discuss the fundamental differences between tracker mortgages and fixed-rate mortgages. Each type offers distinct advantages and disadvantages; understanding this information will allow you to make an informed decision regarding which one best meets your needs.
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage provides peace of mind by locking in an interest rate for a set time period – usually 2, 3, 5, or 10 years – that remains constant during that period, regardless of fluctuations in market interest rates. Your monthly payments remain the same throughout, providing easier budgeting but you may miss out if they decrease.
What is a Tracker Mortgage?
A tracker mortgage is a type of home loan where the interest rate varies and is set at a percentage above the Bank of England base rate, meaning if that changes, so will yours – providing added flexibility if rates drop while potentially increasing payments in case they rise. They can be beneficial when interest rates drop but repayments may increase should base rates increase significantly.
The Current Mortgage Landscape – Will interest rates rise?
Bank of England estimates that inflation reached its annual peak near the end of 2022, driven by energy and food price increases, reaching 8.7%. When inflation exceeds 2%, interest rates will typically be raised in order to try and bring it under control; interest rate rises have occurred regularly since December 2021 with their most recent being 3rd August 2023 when the base rate increased from 5% to 5.25%; this mark represented inflation reaching its highest level since 2008. Yet further interest rate increases seem likely as inflation remains at such levels.
This has had serious repercussions for the mortgage market, with lenders withdrawing hundreds of deals and increasing fixed-rate interest rates by up to 1.5% – taking BOE base rate near 6.5% and increasing repayments on typical 25-year loans by £68 per £100,000. That means on a £200,000 variable rate or tracker mortgage your monthly repayment could go up by £135 a month if you don’t fix beforehand.
For current mortgage rate predictions read our guide on Will mortgage rates go down in 2023 UK?
Should I get a fixed or tracker mortgage?
In the face of fluctuating economic conditions, choosing between a fixed or tracker mortgage can be a pivotal decision. Let’s explore each option in detail to help you navigate this important choice.
Deciding to Fix Your Mortgage Rate
For many homeowners, fixing their mortgage rate is a sensible choice. A fixed-rate mortgage provides the certainty of knowing your exact monthly payments. This can be a relief, especially when compared to the variable rates of your lender’s Standard Variable Rate (SVR). However, like all financial decisions, there are advantages and disadvantages to consider:
- Predictability: With a fixed-rate mortgage, your monthly payments are set, providing stability for budgeting.
- Beneficial rates during the incentive period: During your incentive period, you’ll typically have access to lower rates than if you were on your lender’s SVR.
- Rate security: If you secure a fixed-rate deal when interest rates are low, your lender can’t increase your rates even if interest rates rise in the future.
- Early repayment charges: Should you choose to exit your mortgage early, an early repayment charge could apply. This should be taken into consideration if selling your property soon is part of your plans.
- Possibly higher rates: Based on market conditions and interest rate changes, you may end up paying slightly higher rates than with variable-rate products, particularly if rates decrease.
- No benefit from rate reductions: If interest rates fall, your repayments won’t decrease.
Your decision ultimately hinges on your risk tolerance. A tracker or discount-rate mortgage could offer lower initial rates, yet there’s the chance your monthly payments could rise as your balance fluctuates over time. If you have substantial savings, you might decide this risk is worth taking. However, if you’re barely managing your repayments as is, taking such a risk could lead to financial hardship if your repayments increase.
Deciding to Get a Tracker Mortgage
Choosing a tracker mortgage is an appealing option for many homeowners. Tracker mortgages provide the potential of lower interest rates by following the Bank of England base rate; however, like all financial decisions, there are both pros and cons to take into account before making your choice.
- Potential for lower rates: Tracker mortgages can offer lower interest rates, especially when the base rate is low.
- Benefit from rate reductions: If the base rate falls, your interest rate and repayments will decrease too.
- Transparency: Tracker rates are directly linked to the Bank of England base rate, which is publicly available and not set by your lender.
- Rate variability: Your interest rate and monthly repayments can go up as well as down on a variable rate mortgage. If the base rate increases, so will your mortgage repayments.
- Uncertainty: With an adjustable-rate mortgage, monthly repayments may change from month to month, making budgeting more complex.
- Potential higher costs: Should the base rate increase significantly, you could pay more than expected on a fixed-rate mortgage loan.
Decisions on tracker mortgages ultimately depend on your personal circumstances and risk tolerance. If you can accept fluctuating repayments as long as base rates stay low, then tracker loans could be suitable; otherwise, a fixed-rate deals may provide greater certainty of payments without risk of rising rates.
Mortgage Lenders with Flexible Mortgages
Flexible mortgages give you greater control over how to repay your loan, potentially saving money while giving you greater payment flexibility depending on your current circumstances. They allow for overpayments on your mortgage with no early repayment charge which helps reduce balances more quickly while paying less interest overall.
Below we list some of the mortgage lenders that offer some flexibility on their fixed rate and tracker rate mortgages.
NatWest Tracker Switch
One such solution is the ‘Track and Switch’ facility, offered by lenders such as NatWest. This flexible option combines the benefits of both fixed and tracker mortgages. It allows customers to initially take out a tracker mortgage and then switch to a fixed-rate mortgage at a later date.
The Track and Switch facility is designed for customers who are uncertain about fixing their rate immediately. They can start with a tracker mortgage, which follows the National Westminster Bank Plc base rate. After a minimum period of three months, if they decide to switch to a fixed-rate mortgage, they can do so without undergoing a re-credit score.
Learn more about this product and NatWest mortgage switch options here.
Nationwide’s Tracker Mortgages with no Early Repayment Charges
Mortgage loans require careful consideration of potential costs associated with early repayment. Some lenders impose Early Repayment Charges (ERCs), which can add significant expenses if you decide to prepay. Nationwide is one of the UK’s leading building societies that provides more flexible solutions – take a look here for an example.
Nationwide tracker rate mortgages reserved after 2 May 2014 do not incur Early Repayment Charges (ERCs), giving customers greater freedom and flexibility in making overpayments or early pay-off of their entire mortgage without incurring additional charges. This flexibility can be especially helpful for homeowners who come into additional money through inheritance or bonuses and want to use it towards paying down debt faster.
Leeds Building Society’s Fixed-Rate Mortgages
Leeds Building Society offers fixed-rate mortgage with unlimited overpayments and no ERCs. This provides customers with the stability of a fixed rate while also allowing them the flexibility to make overpayments and reduce their mortgage balance faster without incurring any penalties.
Newcastle Building Society and Kent Alliance’s Discount Mortgages
Newcastle Building Society and Kent Alliance offer discount mortgages with no ERCs. These mortgages offer a discount off the lender’s standard variable rate for a set period, providing potentially lower initial payments. The absence of ERCs gives customers the flexibility to make overpayments or switch to a different mortgage deal without incurring any charges.
Barclays Tracker Mortgages
Barclays offer tracker mortgage deals with no redemption fees. These mortgages follow the Bank of England base rate at a set margin above or below it. This means your payments could go up or down.
Coventry Tracker Mortgages
Coventry Building Society offers tracker mortgages that provide a flexible option for homeowners. These mortgages follow the Bank of England base rate, meaning your payments could increase or decrease. What sets Coventry apart is their policy of no Early Repayment Charges (ERCs) on their tracker mortgages, offering homeowners the freedom to make overpayments or pay off their mortgage early without additional costs.
HSBC Tracker Mortgages
HSBC, a global bank offering an array of mortgage products, also provides tracker mortgages without Early Repayment Charges (ERCs). This means customers have the flexibility to make overpayments or even pay off their entire mortgage early without incurring any additional charges – an especially useful feature for homeowners who come into extra money and wish to use it to reduce debt more quickly.
Skipton Tracker Mortgages
Skipton Building Society offers tracker mortgages with no Early Repayment Charges (ERCs). This provides customers with the flexibility to make overpayments and reduce their mortgage balance faster without incurring any penalties. Skipton’s customer service and competitive rates make it a popular choice for those seeking a tracker mortgage.
TSB Tracker Mortgages
TSB offers tracker mortgages with no Early Repayment Charges (ERCs). This means that customers have the freedom to make overpayments or even pay off their entire mortgage early without incurring any additional charges. TSB’s customer-focused approach and competitive rates make it a popular choice for those seeking a tracker mortgage.
These lenders’ policies of no ERCs on their tracker mortgages provide homeowners with greater flexibility and potential savings. However, as always, it’s important to confirm the details directly with the lender before making a decision.
Is now a good time to fix a mortgage?
With inflation decreasing it will only be a matter of time before interest rates start to improve. Although this will often take several months the chances are that we will see interest rates and mortgage rates start to decrease in 2024.
Whether a fixed or variable mortgage is right for you will depend on your attitude to risk and how tight your finances are. We are seeing an increase in tracker deals and our clients taking less long-term fixed rates as we move towards the end of 2023
Should I fix my mortgage for 3 or 5 years?
Whether you should fix your mortgage for 3 or 5 years depends on your personal circumstances and future plans. A 3-year fix might be suitable if you want a balance between rate security and flexibility, while a 5-year fix offers longer-term stability but less flexibility.
Is a 2 year or 5-year fixed mortgage better?
A 2-year fixed mortgage might be better if you want lower rates and the flexibility to reassess your options in the short term. 5-year fixed mortgage rates could be more suitable if you prefer longer-term stability and protection from potential rate increases, even if the rate might be slightly higher.
What is the difference between a tracker mortgage and a fixed-rate mortgage?
Fixed-rate mortgages offer fixed repayments over an agreed period. By contrast, tracker mortgages' variable interest rates may fluctuate according to Bank of England base rate, meaning your payments could either go up or down.
Is a tracker better than fixed?
Whether a tracker is better than a fixed mortgage depends on your risk tolerance and market expectations. A tracker can be better if you expect interest rates to stay low or decrease, while a fixed mortgage is better if you want certainty in your repayments or expect rates to rise.
When should I choose a tracker mortgage?
You should choose a tracker mortgage if you're comfortable with the risk of fluctuating repayments, expect interest rates to stay low or decrease, and want to potentially benefit from lower rates.
Why are tracker mortgages cheaper than fixed?
Tracker mortgages may be less costly than fixed ones because they require the borrower to assume more risk. When the Bank of England's base rate decreases, your interest rates and repayments do too; but if it rises instead, so do your repayments; thus reflecting their lower initial rates as compensation for this risk.
Your choice between a fixed-rate, tracker, or flexible mortgage depends on your financial situation, risk tolerance, and expected interest rate changes in the future. By researching and seeking professional advice about each option available to you, it will enable you to make an informed decision that best serves your needs.
Be mindful that the mortgage market is constantly shifting and evolving, making it essential to regularly evaluate your mortgage arrangements to make sure they still fit with your circumstances.
Disclaimer: Please keep in mind that the information in this article should only be taken as educational and should not be seen as financial advice.