Understanding Mortgage Options: Fixed Rate vs. Tracker vs. Discounted Variable Rate Mortgages

The category: Mortgage Products

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A guide to understanding the differences between 3 of the most common mortgage product types on the market

When it comes to financing your dream home, choosing the right mortgage can significantly impact your financial future. With various options available, it’s essential to understand the key differences, pros, and cons of each type of mortgage. In this post, we’ll explore the three popular mortgage types for UK homebuyers: Fixed Rate Mortgages, Tracker Mortgages, and Discounted Variable Rate Mortgages. Let’s dive in and find the ideal mortgage for your unique needs.

1. Fixed Rate Mortgages

Fixed Rate Mortgages are popular for their stability and predictability. These mortgages offer an interest rate that remains constant for a specified period, typically 2, 3, 5, or even 10 years. Here are the pros and cons of Fixed Rate Mortgages:

Pros:

  • Stability: With a fixed rate, your monthly repayments remain unchanged throughout the agreed period, allowing for better budgeting and peace of mind.
  • Protection from Interest Rate Hikes: Regardless of any interest rate fluctuations in the market, your rate remains the same, protecting you rate rises during your fixed rate period.
  • Long-Term Planning: Ideal for homeowners who plan to stay in their property for an extended period and who don’t not plan to make changes to their mortgage – providing security in financial planning.

Cons:

  • Early Repayment Charges: If you decide to remortgage or sell your property before the fixed term ends, you may face a penalty known as an early repayment charge (ERC).

2. Tracker Mortgages

Tracker Mortgages are usually tied to the Bank of England’s base rate or the lender’s on Bank Rate, and move in line with these rates. Let’s explore the advantages and disadvantages:

Pros:

  • Benefiting from Rate Drops: If the base rate decreases, your mortgage rate will also decrease, leading to reduced monthly payments.
  • Flexibility: Some Tracker Mortgages allow penalty free overpayments, offering greater flexibility should you want to make large payments to your mortgage, or remortgage away during the initial benefit period.

Cons:

  • Exposure to Rate Increases: If the rate your product is tracking rises, your mortgage rate and monthly payments will also increase, potentially leading to financial strain.
  • Budgeting Challenges: Due to the potential for rate fluctuations, budgeting can be more challenging compared to Fixed Rate Mortgages.

3. Discounted Variable Rate Mortgages

Discounted Variable Rate Mortgages offer a discount on the lender’s Standard Variable Rate (SVR) for a specific period. Let’s examine their advantages and disadvantages:

Pros:

  • Rate Reduction Benefits: If the lender’s SVR decreases, your mortgage rate will also decrease, leading to potential cost savings.
  • Flexibility: Some of these mortgages allow penalty free overpayments, offering greater flexibility should you want to make large payments to your mortgage, or remortgage away during the initial benefit period.

Cons:

  • Exposure to Rate Increases: If the lender’s SVR rises, your mortgage rate and monthly payments will increase accordingly.
  • Less Stability: Unlike Fixed Rate Mortgages, your monthly repayments can fluctuate, making budgeting less predictable.

Choosing the right mortgage type is a critical decision that should align with your financial goals and risk tolerance. Fixed Rate Mortgages offer stability, Tracker Mortgages provide potential for savings, and Discounted Variable Rate Mortgages combine lower initial rates with rate reduction benefits. When deciding on the right mortgage product for your circumstances, you should always seek advice from a qualified mortgage professional.