Deciding on whether you select a fixed rate or variable mortgage such as a tracker or discounted rate can be difficult and is often driven by the economy at the time or future expectations of interest rate movements.
The reason for this is that all lenders have a standard variable rate (SVR) which is linked to the base rate set by the Bank of England. As the Bank changes the interest rate in relation to economic activity lenders may also change their rates. Fixed rate mortgages are influenced more by the cost of borrowing between banks called the ‘swap’ rate and change up or down with market expectations.
The Bank of England reduced interest rates in March 2009 to 0.5% due to the financial crisis and again in August 2016 to 0.25% due to the Brexit vote and lenders also reduced their mortgage rates.
In the long term the Bank of England intend to increase interest rates and this expectation has seen 90% of people select a fixed rate mortgage. The main reason people opt for this route is the certainty of knowing their mortgage payments will remain the same during the term of the special deal, usually for two, three or five years.
A tracker mortgage is a variable rate and offers cheaper interest repayments of about 0.2% compared to a fixed rate but you will pay more if interest rates increase as this mortgage tracks the Bank of England base rate.