If your mortgage deal is set to end in 2023, then you’re not alone. The Office for National Statistics states that 353,000 existing fixed-rate mortgages will need to be renewed in Q1 of 2023 alone.
When your current deal expires, choosing a new mortgage is a significant financial decision, as it will likely dictate how much you’re paying towards your mortgage for the next few years. As such, it’s important to find the mortgage deal that best suits your current circumstances.
Two of the most popular options on offer are fixed- and tracker-rate mortgages. While there’s technically no “best” choice between the two, one may work better for you depending on your economic situation.
Continue reading to discover the main differences between fixed- and tracker-rate mortgages so you can make an informed decision and determine which of the two might best suit you.
Tracker-rate mortgages aim to follow the BoE base rate
A tracker-rate mortgage usually moves in line with the Bank of England (BoE) base rate. If the base rate falls, your repayments will typically decrease, and vice versa.
You can either get a tracker-rate mortgage for an introductory period, or a lifetime tracker, which, as the name suggests, lasts for the entire length of your mortgage.
You may find that the introductory rates for tracker-rate mortgages can be competitive, which usually means lower initial monthly repayments.
Though, one of the downsides of tracker-rate mortgages is their uncertainty. Since they typically follow the BoE base rate, which can change regularly, your repayments could change at some point during your mortgage term. So, your mortgage repayments would normally rise if the base rate were to rise – as it did eight times in 2022.
This can make it difficult to budget effectively, as you don’t know for sure how much your repayments will be from month to month. This is especially the case when the BoE is altering rates frequently during times of market uncertainty.
Fixed-rate mortgages give you the peace of mind that your repayments won’t change for a set period
Meanwhile, a fixed-rate deal is another type of mortgage on offer when you purchase a home. With a fixed-rate deal, your interest rate is guaranteed to remain the same for the duration of your deal, meaning your repayments won’t change typically for two, three, five or 10 years.
The main advantage of a fixed rate is that you know exactly how much money you’ll pay each month over a set period of time, making it far easier to budget.
When your fixed-rate deal eventually expires, you’ll typically be placed on your lender’s standard variable rate (SVR). This is a rate that your lender can change at their discretion.
If you’re on a fixed-rate deal, you may find that you can’t pay off some or all of your mortgage without facing an early repayment charge from your lender. This makes fixed rates less flexible than some variable deals, as you won’t normally be able to repay more than 10% of your outstanding mortgage without a charge.
Additionally, if you are on a fixed rate and general interest rates fall, you normally won’t benefit as your repayments are fixed. However, you are protected against interest rate rises.
With seemingly so much uncertainty in mortgage markets lately, knowing about the different deals on offer is only half the battle – deciding which deal would best suit you in 2023 is just as tricky. So, continue reading so you can make an informed decision regarding the best deal for you this year.
Which deal would best suit you in 2023?
One of the reasons you may choose a variable rate is that the costs of these deals is sometimes less than a fixed rate. Indeed, as of 19 January 2023, HSBC offers an 80% loan-to-value (LTV), two-year fixed-rate standard mortgage with an initial interest rate of 4.94%.
Meanwhile, HSBC’s 80% LTV, two-year tracker-rate standard mortgage comes with an initial interest rate of 4.24%.
While tracker-rate mortgages may be cheaper initially, you could end up paying more if interest rates were to rise. If the BoE continues to increase the base rate, this could make the repayments on your variable-rate mortgage more expensive.
Forbes reports that, due to a high base rate and the issues caused by the mini-Budget, many lenders pulled their fixed-rate deals altogether in late 2022. They were then brought back onto the market at higher prices. This is partly why fixed-rate deals are generally more expensive currently.
Though, as mentioned, if the base rate continues to rise in 2023, the price gap between tracker- and fixed-rate mortgages could close, and fixed-rate deals could become more competitive.
Even if a fixed-rate deal is more expensive, you may decide that you’re prepared to pay the difference for the security and peace of mind a fixed rate can give you.
Get in touch
If you’re still unsure which mortgage deal would best suit you in 2023, you should ideally speak with a mortgage expert. Together, you can take a close look at your financial situation and plan for any eventuality.
Please email enquire@london-money.co.uk or call (0207) 808 4120 to find out how we could help.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.