Pros & Cons: Tracker Rate Mortgage vs Fixed Rate Mortgages
What are the different types of mortgage?
When it comes to taking out a mortgage as a First-time Buyer is the United Kingdom, there are two main types of mortgage rates to consider: fixed rate mortgages and tracker rate mortgages. Each type of mortgage has its own pros and cons, and it’s important to understand the differences between the two before making a decision as a first-time buyer.
Fixed Rate Mortgages
A fixed rate mortgage is exactly what it sounds like: the interest rate on the mortgage is fixed for a certain period of time, usually between 2 and 5 years. This means that the monthly repayments will stay the same for the duration of the fixed rate period, regardless of any changes in the Bank of England base rate.
Fixed Rate Example:
For example, let’s say Jane is a first-time buyer looking to take out a 25 year mortgage on a 2 year fixed rate with a rate of 5%. If she were to borrow £150,000, her monthly payments would be £876.89 for the initial 2 year fixed-rate period before changing onto the lenders standard variable rate at the end of her fixed-rate period.
One of the main benefits of a fixed rate mortgage for first-time buyer is that it provides a sense of security and predictability for the borrow. Jane knows exactly what her repayments will be for the next 5 years and can budget accordingly. Additionally, if interest rates were to rise during that period, Jane would be protected from the increases as her rate is fixed.
Tracker Rate Mortgages
One the other hand, a tracker rate mortgage is linked to the Bank of England base rate. This means that the interest rate on the mortgage will fluctuate in line with any changes in the base rate.
Tracker rate Example:
For example, let’s say that John is a first-time buyer looking to take out a 25-year tracker rate mortgage with a rate of 0.5% above the Bank of England base rate. If the base rate is currently 3.5% , John’s mortgage rate would be 4%. If the base rate were to increase to 4% , John’s mortgage rate would also change to 4.5%.
One of the main benefits of a tracker rate mortgage for first-time buyers is that the interest rate is generally lower than that of a fixed rate mortgage. In the example above, John’s rate is 4% which is lower than Jane’s fixed rate of 5%. This means that John’s monthly repayments would be lower than Jane’s.
However, tracker mortgages also have a downside, which is that the interest rate can increase as well as decrease, which means that the monthly payments would increase or decrease as well. That may be a big concern for many first-time buyers and make it difficult for them to budget accordingly.
Another thing to consider for first-time buyers is that fixed rate mortgages often have early repayment charges. This means that if the borrower chooses to pay off their mortgage or switch to another lender before the end of the fixed rate period, they will be charged a fee. Tracker mortgages, on the other hand, generally do not have early repayment charges.
It’s worth noting that neither of these types of mortgages is a guaranteed fir for every first-time buyer. The best way to find the right mortgage for you is to speak to a professional like prospect tree mortgages. They can help you understand the pros and cons of each type of mortgage and help you find the best options for your individual needs as a first-time buyer.
Making the right choice
In summary, both fixed rate mortgages and tracker rate mortgages have their own benefits and drawbacks for first=–time buyers. While fixed rate mortgages provide predictability and protection against interest rate increases, tracker rate mortgages have lower interest rates and no early repayment charges. Ultimately, the best way to find the right mortgage for you as a first-time buyer is to speak to a professional mortgage advisor who an guide you through the process.
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