Should you choose a fixed rate, tracker or discount mortgage?

A fixed rate gives security by locking borrowers into set payments for a period of time

These mortgages typically track the Bank of England base rate.

The advantage is that you are guaranteed to benefit from the full effect of any rate cut – lenders frequently shortchange borrowers by reducing their standard variable rate by, say, 0.2 per cent when the central bank has cut by 0.25 per cent. Of course, you are also guaranteed to feel the pain of rate rises.

Some lucky borrowers on tracker mortgages saw interest payments slashed to nothing, thanks to the base rate falling to 0.5 per cent in March 2009. This was because previously lenders had offered trackers at below bank rate, with some at bank rate minus 0.5 per cent or more. This meant that as interest rates fell, their rate dwindled away to zero.

Anyone considering a tracker should try and secure one with either no early redemption charge, making it free to leave for another deal, or with a cap on how high rates can go.

While your tracker mortgage rate is low, you can take the opportunity to overpay on your mortgage, shortening the total length of time it takes you to pay off your mortgage, and cutting the amount of interest you pay.

Fixed rates

If you have stretched yourself in trying to buy a property or if you are someone who likes the security of knowing your repayments won’t change, then a fixed-rated deal is probably for you.

But you do have to pay for this additional security – rates on fixed rate deals are higher than for variable special offers and many lenders have high fees for their best deals.

Two-year fixed rates are the most popular with British homeowners, but increasing numbers of borrowers are turning to longer term fixed rates of five or ten years. These longer measures give more security and cut down remortgaging costs, but you will have to pay a hefty penalty to leave.

If you choose to do this, make sure that your loan is portable and so can be carried with you if you decide to move house, but remember any extra borrowing will generally have to be with the same lender.

Discount rates 

These deals are linked to a lender’s standard variable rate but tend to track it at a discount or margin above it. They leave you exposed to the danger of rising interest rates, as their rate will rise when the bank rate does. The pay-off is that rates tend to be more attractive than fixed-rate deals.

However, because your discount rate tracks your lender’s SVR – and you have no control over what that is – a discount mortgage does not offer much rate stability.

Can you afford a rate hike? 

If you’re on a tight budget and need your repayments to stay the same from month to month, it makes more sense to choose a fixed rate mortgage.

If you can afford to take a gamble on rates staying low, you may opt for a tracker – especially if you value any extra flexibility offered by some with no early repayment charges.

With interest rates at rock bottom and fixed rates very low, the latter look more tempting to most borrowers right not.

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