Tracker vs. fixed rate: which mortgage is best for you?

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By Paul Davies
Know Your Money Editor

With slight improvements in the economy creeping through following the recent economic turbulence, some people looking to get onto the property ladder may have been disappointed to hear that mortgage rates are set to rise.

The mortgage market can prove complicated and there are a range of options that may be worth considering, but which is best for you?

The state of the market

Mortgage loan approvals in March this year were 45 per cent higher than the same month the previous year, the Council of Mortgage Lenders (CML) recently reported.

A total of 45,000 new mortgage approvals were granted in the month and the CML stated that for the second month in a row, first-time buyers borrowed an average of 76 per cent of the property price.

Average deposits have not been lower than 25 per cent for more than one month since January 2009, suggesting those hoping to climb the property ladder are struggling to get a foot on the first rung.

This was backed up by the latest NatWest Intermediary Solutions report, which found 88 per cent of mortgage brokers polled stated raising a deposit was the most problematic issue.

In comparison to this just four per cent cited poor credit ratings and three per cent opted for the affordability of monthly interest repayments as the greatest concerns.

Graham Felstead, head of the intermediary channel at NatWest Intermediary Solutions said: "For those who are lucky enough, they can turn to the bank of mum and dad to supplement their savings but it's important to recognise the alternatives that are on offer.

"Government-backed shared equity schemes such as HomeBuy Direct enable first-time buyers to reduce the size of a self-funded deposit by securing a low interest loan of up to 30 per cent of the house price before getting a mortgage for the balance.

Fixed-rate

Fixed rate mortgages offer a set rate of interest over an agreed period of time - this is often two, three or five years, although longer deals are also available.

After the fixed rate deal has come to an end people will be switched to a variable rate, which could be a good time to look at securing a new deal.

Positives of fixed-rate mortgages

Five-year fixed deals have seen rates edge down in recent times and are now starting at 4.49 per cent.

This is an improvement on two years ago when the best deals were 5.5 per cent or more. However, back in 2003 deals were available for as little as 3.75 per cent.

Experts have recently suggested fixed rates could be an option worth considering for people who are on a tight budget and looking for a mortgage in the near future.

Ray Boulger at mortgage broker John Charcol recently suggested the economic uncertainty in the UK could be one reason to choose a fixed-rate mortgage deal.

Of course, the disadvantage of such deals could be that if interest rates tumble you are stuck with an uncompetitive deal.

Variable

The amount you pay on a variable rate mortgage can - as the name suggests - move up or down. This usually occurs when the Bank of England announces a change to the base rate. However, it can vary depending on what type of variable rate deal you have - tracker or discount.

People with a tracker deal will find their mortgage rate is set at a fixed margin to Bank rate and should increase or decrease according to interest rate changes.

This would mean that for those with a mortgage deal at two per cent above base rate - currently at 0.5 per cent - would pay a rate of 2.50 per cent.

Alternatively, there is a discount mortgage, which works slightly differently. Rather than being linked to the Bank rate, the amount paid is linked to your lender's standard variable rate (SVRs). Providers often change their SVRs if there is an increase or decrease in the bank rate,

Variable rate mortgage deals - tracker or discount - have the advantage that you should benefit from lower monthly repayments if interest rates fall, however they can also go up if they increase.

Get a deal to suit your finances

Those looking to get on to the property ladder may wish to decide whether they would prefer the security of a fixed rate or are content with taking a gamble and opting for a variable deal.

Deposit size may also be an important consideration, as could the length of time you are willing to be tied down for.

To compare the latest tracker and fixed rate mortgages from leading UK lenders click here.

Important Notice
This guide is intended for general information only and is not intended as, and does not constitute, any form of advice, recommendation or endorsement by us of any particular product(s) or services and you should rely on your own further research and professional advice in relation to your specific requirements and circumstances before purchasing any products or services. Use of this guide is subject to the Terms of Use of the KnowYourMoney site.