These types of mortgages offer different levels of risk and flexibility and may appeal to certain types of people or at times of different economic activity. At the end of the offer period both types will revert to the standard variable rate (SVR).
A fixed rate mortgage has an interest rate that remains fixed for the whole of the offer period, usually two, three or five years. Every month the amount of your repayments remains the same even if the Bank of England base rate increases or decreases or your lenders SVR changes.
If you want the peace of mind and know exactly how much your mortgage will cost each month the fixed rate mortgage is the suitable option. The Bank of England base rate reached 0.5% in March 2009 and if you expect this to rise in the future a fixed rate mortgage will ensure you will not have to pay more interest.
In contrast a tracker mortgage is a type of variable rate mortgage where the interest rate tracks the Bank of England base rate. This will be set at a percentage above the base rate such as 0.75% or 1.0% during the offer period such as two, three or five years or sometime for the lifetime of the mortgage.
As soon as the base rate changes either up or down, the lender will also change the interest charged on the tracker mortgage. In some cases where you pay a higher fee the tracker mortgage deal can include greater flexibility such as being able to exit the offer period without penalty.
If the Bank of England base rate is high you may feel you could benefit if the base rate falls and opt for a tracker mortgage. Tracker mortgages charge about 0.2% less than a fixed rate so you could save money in the short term. However, you must be able to afford an interest rate rise if due to economic activity there is a rise in the base rate.