How to choose between a fixed or tracker mortgage

Rates continue to fall in anticipation of further Bank Rate reductions

After a tumultuous couple of years, mortgage rates are much more settled than they have been – but borrowers aren’t out of the woods yet. 
Inflation measured 1.7pc in September, down from 2.2pc in August, according to the Office for National Statistics (ONS). It’s the first time it’s been below the Bank of England’s 2pc target in three years, thanks to falling prices for air fares and motor fuels. 
It hoped this month’s inflations figures will be enough to persuade the Bank’s Monetary Policy Committee to cut interest rates further at its next meeting. The next Bank Rate announcement is due on November 7.
While the future of the Bank Rate looks positive, some mortgage lenders have been increasing rates in recent days. This comes after swap rates – the main pricing mechanism for home loans – rose in reaction to potential increases in government borrowing, and uncertainty surrounding Labour’s forthcoming Budget on October 30.
Average rates for fixed deals have been falling gradually over recent weeks, currently at 5.37pc for a two-year fix, and 5.06pc for a five-year deal, according to the analyst Moneyfacts. The average two-year tracker, meanwhile, is 5.67pc.
Some people may find they’re offered similar rates for both types of mortgages.
One of the cheapest two-year fixed-rate mortgages available across the UK for someone remortgaging is now 3.89pc, offered by Santander according to Moneyfacts. It is available for buyers with a 40pc deposit or equity, and has a £999 product fee.
Fix for five years, and one of the cheapest rates available is 3.78pc, from Santander, again for those with 40pc equity. It has a £999 product fee.
Meanwhile, tracker mortgages could be the right choice for some people, particularly in the light of the Bank Rate cut and the likelihood of further reductions on the horizon.
“I would suggest a tracker would still make sense for a lot of people as the Bank Rate is likely to reduce in the next two years,” said Ashley Thomas, director at Magni Finance, a London-based mortgage broker. 
“It depends on the situation, whether you have plans to move, and how much risk you are willing to take.”
Justin Moy, managing director EHF Mortgages, agrees that the “best” deal depends on your attitude to risk: “A nervous borrower who does have concerns about fluctuating rates, and cannot cope with potential increases, will normally be better with a fixed deal, possibly short-term,” he said. 
Alice Haine of Bestinvest said: “Existing borrowers on tracker mortgages must now wait until the next MPC meeting to see if their repayments ease. Meanwhile, borrowers whose cheap fixed-rate deals – taken out before the BoE’s tightening cycle began – are about to expire will face a heavy repayment jump when they refinance. 
“Their next big decision centres on whether it is best to lock in another fixed-rate deal, or whether a tracker might work out best over the longer term? Whatever option they choose, committing to a new deal is key otherwise they risk reverting to their lender’s ultra-expensive standard variable rate, with the average SVR remaining high at just below the 8pc mark.”
It is important to remember that the lowest interest rates do not necessarily equate to the best deal. High fees can sometimes outweigh marginal savings on similarly priced interest rates.
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This depends on a lot of factors, including your need for bills to stay the same for the long term, your likelihood of moving and the economic outlook when you choose a deal. 
Most common fixed-rate deals last for two and five years; while five-year deals can be cheaper, you run the risk of being stuck on an overpriced rate if borrowing becomes cheaper during the term of the loan – but if rates rise during that time then you’ll be protected.
While further Bank Rate cuts are expected later this year, the cost of borrowing this year will remain inflated, serving as a shock for households coming off rates fixed two or five years ago. 
More than 1.4 million borrowers will pay higher rates this year as their fixed deal comes to an end, according to figures published by the Office for National Statistics.
Nicholas Mendes, of broker John Charcol, says: “The gap between two-year and five-year fixed mortgage rates is still expected to narrow despite the recent uptick in mortgage rates this past week. 
“By the end of 2024, five-year rates could still drop to around 3.5pc, while two-year rates are expected to be around 3.8pc. As lenders respond to falls in future swaps and increased competition over the next two months, we will likely see even more attractive mortgage deals. 
“While the best rates will continue to be reserved for those with larger equity or deposits, mortgage rates for 90pc/95pc [deals] could potentially reach around 4.5pc by the end of the year. This would provide financial relief to homeowners, encourage first-time buyers, and motivate home movers, boosting both the housing market and the wider economy.”
If you need to remortgage in the next three to six months, it may be possible to secure a new mortgage deal early, which will still be valid by the time you need to actually make the switch.
However, some lenders have recently reduced the length of their “lock-in period” for loan offers, so be sure to check how long you’ll have to ditch and switch if you see a better offer elsewhere.
Mr Mendes said: “It’s important to consider that some lenders have reduced their typical six-month validity period; for instance, Nationwide still offers 180 days, but others – like Santander and Halifax – have shortened theirs to four months (120 days).”
Locking in a new deal now – whether it’s for a tracker or a fixed-rate – may shield you in case of any unexpected rate rises. After all, if the past couple of years have taught us anything, it’s that the mortgage market can turn in a very short period of time. 
Having a new mortgage lined up ahead of time will also save you from spending any time on your lender’s standard variable rate (SVR), which will almost certainly charge far more interest than any fixed or tracker options. 
David Hollingworth, of broker L&C Mortgages, said: “Once an application is made a deal will be secured and that could be done up to six months before the end of the current deal.  
“That will mean that borrowers are protected against any further rises in fixed rates, but they can still change to a new deal if rates improve in the meantime.”
It’s a good idea to speak to a mortgage broker to assess your options before making any firm decisions. 
If you’re concerned about whether your budget will be able to stretch to higher mortgage costs, talk to your lender. 
Sam Richardson, deputy editor of Which? Money, said: “Mortgage lenders are obliged to offer support to their customers, so those struggling to meet mortgage payments should speak to their lender about what help is available. Doing so will not affect your credit rating. 
“Further support may come in the form of temporary break from payments, interest-only repayments or extending the term of the mortgage.”