18 September 2015

What are the advantages of fixed and tracker mortgages?

With the Bank of England base rate  at a historic low of 0.5%, many homeowners have been enjoying low mortgage interest rates since 2009. Customers who have let their initial fixed rate revert onto a Standard Mortgage Rate (SMR) or Base Mortgage Rate (BMR) may be comfortable with their current rate at the moment, as with low repayments there’s no urgency to shop around for a new deal.

But things could be changing. In a speech  given in July 2015, Bank of England Governor Mark Carney said that he expects the Bank of England base rate to rise gradually from its all-time low with a target of 2% by 2017. 

A higher base rate could leave existing variable rate mortgage customers facing increased repayment amounts – and as the mortgage market shifts in response to this change, customers may find that good value mortgage deals are more difficult to come by. 

So if you’re looking for a new mortgage deal, what are your options?

Fixed or Tracker?

Fixed rate mortgages give customers the chance to lock in an interest rate for a set period of time – up to 10 years in some cases. This means the rates and repayments are certain, whatever happens. Whereas the interest rate on tracker mortgages will rise and fall depending on the Bank of England base rate.

Because the base rate hasn't risen in over 6 years, tracker mortgages have been seen as an attractive option.  Many variable and tracker rate customers are currently paying back less each month compared to those on fixed rates. In the first quarter of 2015, the average UK fixed rate was 3.13%, while the average variable rate was 2.58%.

So how do you choose the best type of mortgage for you, and does the stability of a fixed rate deal outweigh the flexibility of a tracker rate?

Here are some reasons people choose fixed and tracker deals

Fixed because…it’s easier to budget

With a fixed deal you’ll know what your repayments are for the duration of the fix, and they’ll always be the same. That means it’s straightforward to budget for your mortgage costs both month-to-month and longer term. There is a potential risk when fixing your mortgage rate that you become accustomed to paying the same amount each month and at the end of the fixed rate period you could suddenly experience a rise in your monthly payments.

Tracker because…the base rate is unlikely to rise quickly

Base rate rises have been predicted in the past, but the low rate has held steady for 6 years and, as Mark Carney said, it's unlikely to rise sharply any time soon. If you choose a tracker deal, you may feel that the lower rate available at the moment outweighs the chances of being hit with a sudden hike in repayments.

Fixed because…cheap fixed rate deals may not be around for long

The mortgage market has seen fierce competition among lenders recently, with fixed rate mortgages dipping down towards the 1% mark. Along with these attractive low interest rates come offers like reduced or zero product fees, cashback when you take out the mortgage, and free valuations and legal fees, which could reduce your overall costs. However, these rates and offers aren’t guaranteed to stick around, especially if the base rate rises.

Tracker because…you may want more flexibility

If you’ve been paying back your mortgage for a while, your outstanding loan may be small enough that fluctuations in your repayment amount don’t have much impact on your family finances. And if the base rate remains low, you could find that your low repayments give you extra disposable income. There is no Early Repayment Charge on a Nationwide tracker mortgage, so you may make overpayments of any amount, redeem your mortgage or change your mortgage deal without incurring a charge. 

Find out more

As you can see there are pros and cons to both tracker and fixed rate mortgages. But which best suits your needs?

We have a range of deals for customers who want to switch here.

Nationwide is not responsible for the content of external websites or apps. Reference to any organisations' website or app is not an endorsement of that website or app or the organisations' products or services.

Most popular

The Budget 2017


Chancellor Philip Hammond presented his first – and last – Spring Budget to Parliament yesterday. Here’s your easy guide to the changes.

You may also be interested in...

Our helpful guides

We've created a range of helpful guides to help you make better financial decisions regardless of your circumstances. Find out more about owning property, growing wealth and planning for life events.

Our products

Whether you are after a current account, a savings account or even looking for a mortgage, Nationwide has a range of great products that could help you, no matter the situation.