Tracker or Fixed - Choosing the Right Remortgage for You
In choosing to get a remortgage, one of the things you will need to decide upon is which remortgage product best serves your individual needs. The decision should not be a quick one, but one with much thought and consideration.
The decision you are most likely to need to make is whether you should choose a fixed rate remortgage or a tracker rate remortgage. These are the two type of remortgages you are most likely to encounter when dealing with a remortgage lender. Both of these types of remortgages can be subject to having associated fees or charges to obtain them and they can be subject to early repayment charges. Early repayment charges would be a penalty that could occur if you wished to make overpayments or pay the mortgage in full before the end of the product’s agreement term or period.
A fixed rate remortgage is a loan that has a set interest rate for a fixed period of time. This is an advantage for a homeowner that does not have the ability to adapt to a higher monthly mortgage payment should the Bank of England’s Monetary Policy Committee increase the interest rate. The rate would remain steady and would not change if the standard rate interest rate increased or decreased. An obvious disadvantage would be if the rate decreased to a level way below the fixed rate remortgage a homeowner secured. Most likely the security of having a fixed rate and not being exposed to a possible rate increase far out weighs the possibility to maybe saving money through a rate decrease. A homeowner that wants a fixed rate remortgage is wanting a remortgage with the least amount of risk.
When looking at a fixed rate remortgage deal a homeowner will find that the higher the equity or deposit with the remortgage then the lower the rate that can be secured. Also, the shorter the length of the fixed period for the remortgage then the lower the rate. A longer fixed period will warrant a higher interest rate.
A tracker rate remortgage is almost the opposite of a fixed rate. The main characteristic of a tracker rate is that it does not have a fixed interest rate. Instead, the interest rate on the remortgage fluctuates up and down according to the Bank’s interest rate by a set amount on top of the Bank’s rate. In other words it is a rate that tracks the rate of the Bank, thus it is called a tracker. This is the kind of remortgage that can allow a savings should the economic environment be one where the homeowner will experience a lowering of their interest rate. It does pose some risk, for if the Bank’s rate increases then so will the remortgage’s rate.
Tracker remortgages are for a set period as well. Once the remortgage deal’s time period is over then the homeowner will revert to the lender’s standard variable rate. This rate can fluctuate up or down as the lender sees fit and is different from a tracker in that it is not set by how much the interest rate can go up or down, making its rate a “variable”.
Tracker remortgages are going to have the better interest rate deal for the homeowner over a fixed rate remortgage. The lender has less risk in this type of loan of losing money and instead the risk lies with the borrower, so rates on tracker remortgages are generally much better. Again, as with the fixed rate remortgage the amount of equity involved and the time period of the tracker will determine the better rate of what is offered.