Fixed rate mortgages vs tracker mortgages

Fixed rate mortgages and tracker mortgages are the most popular loans on the market. Whilst all borrowers seek the best mortgage rate, there remains a lot of guesswork regarding which one is right. If economists can’t agree on the direction of interest rates, what chance does a layman have?

Are Fixed Rate Mortgages or Tracker Mortgages More Popular?

Fixing a rate at a high level can be frustrating when interest rates start to come down. Similarly, tracker rates can prove expensive when interest rates start to climb to combat inflationary pressure. Which type of loan is preferred by borrowers?

Data provided by the Council of Mortgage Lenders show that fixed rate mortgages account for 70% of all loans taken out in Britain. This demonstrates that homeowners prefer certainty. They remain more popular than tracker deals even when it was clear that interest rates were coming down.

Why Choose Fixed Rate Mortgages?

The world is an uncertain place and increasing numbers of people don’t wish to gamble with their finances. They help alleviate market uncertainty by ensuring that the borrower pays a set amount each month, regardless of Bank of England base rate changes.

Fixed rate loans allow easier budgeting and help those of a nervous disposition. If on a fixed income, being able to plan provides peace of mind. Restrictions on overtime and second jobs being so hard to come by add further validity to taking the safe option.

Why Choose Tracker Mortgages?

A tracker deal is the best mortgage for borrowers when it is believed that interest rates are likely to be reduced. It allows borrowers to benefit from Bank of England base rate reductions, leaving more money for other monthly expenses.

Unless a discounted base rate tracker is taken out, it is normally possible to switch to an alternative mortgage deal without paying a hefty redemption penalty. This means that a borrower can easily switch to a fixed rate loan should the interest rate tide turn for the worse.

There is no right or wrong answer when it comes to choosing the best mortgage product. Seek advice from a mortgage broker or use an online price comparison service before opting for a fixed rate mortgage or tracker mortgage as quality advice can help to keep monthly repayments to a minimum.

How to Reduce Mortgage Interest Payments

With the Bank of England setting interest rates at a 315 year low of just 0.5 per cent, there couldn’t be a better time to reduce mortgage interest payments. In an interview with Sky News on the 6th March 2009, Bank of England Governor, Mervyn King stated that he saw little scope for further base rate reductions. Whilst the terms are now stricter, there are still a range of offset mortgages, tracker mortgages and fixed-rate mortgages available for homeowners.

How an Offset Mortgage can Reduce Mortgage Interest Payments

An offset mortgage involves offsetting savings against mortgage interest payments. For example, if a homeowner owes £200,000 on their home and has £75,000 in savings, they would only make mortgage repayments on £125,000 rather than the full £200,000. This means that the following mortgage repayments would be payable:

Mortgage interest payments on a £200,000 offset mortgage at 5% APR are £833.33.
Mortgage interest payments on a £125,000 offset mortgage at 5% APR are £520.83.

The offset mortgage allows a homeowner to reduce mortgage repayments by £312.50 pcm. This figure would be fractionally reduced by interest that is paid on personal savings, but most homeowners that have access to savings stand to save hundreds of pounds each month with an offset mortgage.

Fixed Rate Mortgage Vs Tracker Mortgage

A tracker mortgage currently offers homeowners the lowest mortgage interest payments because the Bank of England has set base rates at 0.5 per cent. However, interest rates will rise as the global economy improves. Homeowners seeking to keep mortgage interest payments low over a period of time are likely to find that a fixed-rate mortgage deal helps families achieve this objective.

How a Mortgage Broker Helps Reduce Mortgage Interest Payments

Homeowners choose a mortgage broker as they will trawl the market for the best fixed-rate mortgage, offset mortgage or tracker mortgage deal. This helps families to minimise the payment of mortgage interest as the entire market has been optimally searched. It must also be remembered that brokers charge a fee of up to 1 per cent of the loan amount for their services and this must be factored in when determining mortgage repayment savings.

Homeowners should wait until the end of their mortgage term to avoid having to pay an early redemption penalty. Saving money on mortgage interest payments is rarely achieved through a visit to the local bank. Families that don’t want to pay a mortgage broker can use an online mortgage comparison service to find the best fixed-rate mortgage, offset mortgage or tracker mortgage deal and reduce mortgage repayments.