Are fixed rate mortgages still the way forward?

It’s important to note that no one mortgage product is ‘correct or incorrect’, it is always best to speak to an adviser regarding your circumstances and to get advice over which product is right for you. Here, the mortgage experts at George Square share an overview, as well as the pros and cons, of your main mortgage options.

Discount rate mortgages

A discount rate mortgage is linked to your mortgage company’s Standard Variable Rate (SVR) and is often the cheapest mortgage product on the market.

The SVR is an interest rate set by your lender, which it can raise or lower by any amount and at any time. It is influenced by the Bank of England base rate, but not tied to it.

A discount rate mortgage sets the interest rate you pay at an amount below the lender’s SVR for a defined period. Because it is a type of variable-rate mortgage, the amount you pay could change if the SVR changes.

Pros: These mortgages can often start much cheaper than fixed rate mortgages; the interest rate charged is generally — but not always — lower than fixed rates on offer. Discount rate mortgages can also take advantage of falls in the SVR in certain economic situations – for instance, many rates were lowered in 2020 to help control the economic impact of coronavirus on the UK economy.

Cons: Because your monthly mortgage payments are not fixed, your repayments can rise, making it harder to budget. In addition, a discount mortgage may have a collar, which means that your discounted interest rate cannot fall below a certain percentage. This limits how much you could benefit from it.

Tracker mortgages

Tracker mortgages function in a similar way to discounted variable mortgages. However, their key differential is that they are directly linked to the Bank of England base rate of interest, with a margin added by the lender. This means tracker mortgages often have among the lowest interest rates available.

Pros: When interest rates are low, they can start cheaper than a fixed deal.

As with discount rate mortgages, tracker mortgages can also take advantage of falls in the base rate, and sometimes offer more flexibility.

Cons: Repayments can rise if the base rate rises, making it more difficult to budget. Additionally, if you can find a deal with a cap on maximum interest rates, the initial rate may be high.   

Fixed rates

Fixed rate mortgages are arguably the most secure of mortgage products; the rate you agree is the rate you pay for the length of your mortgage product term.

Pros: Fixed rate mortgages are particularly appealing to borrowers who want peace of mind that their monthly repayments aren’t going to suddenly spike if interest rates increase.

Typically, a fixed rate mortgage deal will be for two or five years. A five-year fixed gives the opportunity to lock into a low rate for a longer period, avoiding extra fees and higher rates in a relatively short time. A two-year fixed, however, may be preferable if you’re looking to move home or would like to reassess the market again sooner rather than later.

Cons: Fixed mortgages can sometimes be more costly over the term of the product; they have less flexibility, meaning you run the risk of missing out on cheaper deals should rates fall during the fixed term of your deal.

Act now!

There is no ‘right or wrong’ choice when it comes to these products – it’s just about finding what the best option is for you.

Whatever the right type of mortgage for your circumstances, shopping around and speaking to a good mortgage broker is a wise move. The experienced mortgage advisers at George Square Financial Management would be happy to chat through your options and help you secure the right mortgage deal for you.