Picture this: you’re at a carnival and you’ve got three ride options – one that’s slow and steady, one that follows a winding track, and one that’s all over the place like a squirrel in a hurricane.
These are your three main mortgage types: Fixed Rate, Tracker Mortgages, and Variable Rate Mortgages. So, let’s break down the rides in a bit more detail…
What is a fixed rate mortgage?
A fixed-rate mortgage is the Ferris wheel of mortgages – steady, reliable, and oh-so predictable. With a fixed rate, your interest rate remains constant until an agree date, no matter what happens to interest rates in the market - which means no surprises! Fixed rate periods usually come in 2-, 3- and 5-year periods. If you like the stability of knowing what your monthly mortgage payments will be, then jump in a fixed rate carriage and enjoy the views knowing that if interest rates go bananas, yours will stay put.
That being said, if interest rates drop, you’ll be stuck on the Ferris wheel and might miss out on potential savings. It’s like buying a ticket to the carnival and finding out that they’ve just dropped the price.
Like a Ferris wheel – once you’re on the ride, it’s tricky to get off! Fixed rate mortgages usually come with an early repayment charge. So, if you’re planning a move or expecting a lottery win during your fixed rate period, you’ll have to pay to get out of the deal. Most lenders allow overpayments by up to 10% of your mortgage balance, without penalty, during a fixed term.
How does a tracker mortgage work?
A tracker mortgage is the twister of the mortgage carnival. With a tracker mortgage, your interest rate "tracks" the base rate set by the Bank of England, plus a set percentage.
So, if the base rate goes up, your rate goes up too (cue the dramatic music), and if it goes down, well, you’ll be singing. It's like having a built-in safety net that adjusts to keep you on the right financial path.
In difficult economic situations, a tracker mortgage can be like rain coming in and ruining your lovely carnival day, so it’s important to carry a financial raincoat and make sure you’re able to cover your repayments if the interest rate increases.
What are variable rates?
Variable rate mortgages are like the roller coasters for your finances – exhilarating, unpredictable, and maybe just a tad bit terrifying. Rates are set by your lender and can go up or down at any time. So, one month you might be riding high on a wave of low interest rates, and the next you're clinging to your wallet as rates shoot up faster than a rocket.
Many borrowers roll sleepily out of their fixed rate period onto a variable rate set by the lenders without realising it. Hopefully thanks to our little carnival analogy (and some calendar reminders and number-crunching!), you won’t get caught out by sneaky rates!
Happy house-hunting!