What is the difference between a fixed-rate mortgage and a base-rate tracker mortgage?
Noel McLaughlin, of Butterfield Bank, replies:
THE terms ‘fixed rate’ and ‘base rate’ relate to the interest payments a borrower makes on top of the loan amount for their mortgage.
A fixed-rate mortgage provides the same interest rate for an agreed term, which typically is between two to five years.
However, some products, such as Butterfield’s ten-year fixed-rate mortgage, offer longer agreements.
This type of mortgage provides security and makes budgeting easier which, for many, is especially important when the news is full of headlines about the increasing cost of living during these uncertain times.
The rate remains the same for the loan’s entire term and the borrower knows exactly what the mortgage repayments will cost each month.
A base-rate-tracker mortgage consists of a pre-determined interest rate on top of the Bank of England base rate, which can move up and down.
The base rate is heavily dependent on the state of the economy, so this type of mortgage can pose a risk of uncertainty for the borrower.
The announcement of a second interest rate rise in three months at the start of February, combined with inflation, means Islanders may want to re-evaluate their finances, including their mortgage provision.
More than two-thirds of our clients are now favouring fixed over base-rate trackers, as they anticipate further increases in the base rate over the course of 2022.
Relatedly, borrowers are also looking for longer-term fixed mortgages; so far in 2022 we have already seen a greater demand for ten-year or five-year fixed terms.
Fixed-rate mortgages have the advantage that borrowers do not need to consider whether interest rates, base or otherwise, are expected to change in the near future.
The tracker, however, could potentially save borrowers money in the long term should markets stabilise and rates fall again.
