Tracker vs SVR vs Fixed

What is the difference between a tracker, SVR and fixed mortgage? We answer this question below and ask what the best type of mortgage deal is for buyers and homeowners remortgaging right now.

What is a fixed mortgage?

A fixed mortgage is a mortgage with a fixed interest rate for a set period. The interest rate remains the same each month and therefore your mortgage repayments always remain the same. When the initial period ends, the fixed-rate mortgage will switch to another mortgage type, typically a variable-rate mortgage.

Pros of a fixed mortgage

• With a fixed mortgage you know exactly how much your mortgage payments will be
• A fixed mortgage protects you from sharp interest rate rises

Cons of a fixed mortgage

• Fixed rates are usually set at a higher rate than the current tracker or variable rates, so you commit to higher rates than what are offered elsewhere 
• You may end up repaying more than other mortgage types if interest rates fall during the fixed term

What is a SVR mortgage?

A Standard Variable Rate (SVR) mortgage is a mortgage with a variable rate of interest. The interest rate will increase or decrease during the mortgage term. Many fixed-rate mortgages transfer to SVR mortgages when the initial fixed-rate period ends.

A SVR mortgage interest rate will also be subject to changes to the base rate, but it doesn’t track the base rate in the same way as a tracker mortgage does. The rate charged can vary based on the lender and other factors.

Pros of a SVR mortgage

• SVR mortgages usually offer lower rates than fixed-rate mortgages at the time of taking out the mortgage
• Your interest rate can reduce

Cons of a SVR mortgage

• The interest rate is subject to changes so you won’t know for sure how much you’ll have to repay in the future
• You’re not protected from ongoing or sharp interest rate increases

What is a tracker mortgage?

A tracker mortgage is a mortgage where the interest rate “tracks” the Bank of England’s base rate. If the BoE base rate increases, so does the interest on your mortgage – and vice versa.

However, the interest you’re charged on a tracker mortgage doesn’t match the BoE’s base rate exactly. The interest is set slightly above this rate. A tracker mortgage might be the base rate plus a fixed 1%. In this example, if the base rate was 2.5%, your mortgage interest rate would be 3.5%

Pros of a tracker mortgage

• The interest rate can reduce if the base rate reduces
• Tracker mortgages offer a degree of certainty and transparency regarding the amount the bank will change the rate based on the base rate and their “fixed addition”

Cons of a tracker mortgage

• The interest rate will still increase if the base rate increases 
• Some tracker mortgages have a minimum interest rate they will never fall below

What is the best type of mortgage right now?

It can be difficult to know what type of mortgage to get right now in this period of inflation and uncertainty about what’s next. The optimum plan was to take out a low fixed-rate mortgage for as long as possible just before inflation soared. But not everyone had this foresight.

A fixed mortgage is still best if you believe interest rates are going to continue to skyrocket next year. Whereas tracker and SVR mortgage will offer lower rates right now, but these rates could surpass fixed mortgage deals if we do experience more rises in 2023.

In truth, nobody can claim to know 100% what is best. But you can speak with a professional mortgage adviser for further understanding and guidance.

November 2022