Fixed, tracker or variable?

Once the repayment method is decided, there are lots of individual rate choices.

It is important to work out which product would be best for your circumstances and often the cheapest looking products may have the highest fees or not have the flexibility required. All this could cost money in the longer term.

Fixed rates are as simple as they sound. This is where you agree to fix at the same rate for a set period of time, normally two, three or five years.

This can give some much needed peace of mind as there will be no changes to your mortgage payments, allowing you to budget accordingly.

There are normally tie-in penalties, or redemption penalties, within the fixed-rate period that mean you are unable to repay the whole loan without a cost penalty being imposed.

For example, with a five-year fixed rate repaying the loan early could involve a fee of 5% of the loan amount being charged on top of the amount you owe.

For many people, this is not an issue as the security of the fixed rate saves on sleepless nights worrying about interest rate increases.

Tracker and variable means the rate can change at any time subject to decisions by the Bank of England or by your lender.

The most popular type of variable rate is the tracker mortgage. These track the Bank of England base rate over a certain period of time, from two years to the whole length of the mortgage.

For example, if the product is set at 2% above the Bank rate, which is at 0.5% now, the initial rate would be 2.5%.
However, if the Bank rate increased to 1.5%, payments would then be based on 1.5% plus 2% which equals 3.5%, hence the greater risk element. Of course, this can also move downwards, reducing your current rate.