A fixed-rate mortgage locks your interest rate for a set term, usually two or five years. A tracker moves with the Bank of England base rate, at a fixed margin above it.
That is the whole difference. Everything else follows from who takes the risk that rates move.
This week's turmoil in the bond market pushed gilt yields around, and with them the swap rates that lenders use to price fixed deals.
Trackers did not budge, because the base rate did not.
For a household weighing a remortgage in the next year, that contrast is the useful lesson. This article is general information, not financial advice.
A fix buys certainty and a tracker buys flexibility, and you pay for whichever you choose
Each rate is set by a different market, so each behaves differently
Fixed deals are priced off swap rates, the cost to a lender of borrowing at a fixed rate for two or five years. Swaps follow gilt yields.
That is why fixed deals can be repriced weekly, and why lenders pull products at a few hours' notice when gilts wobble.
A tracker is priced as base rate plus a margin, for example base plus 0.5 percentage points.
It changes only when the Bank's Monetary Policy Committee moves, which it considers eight times a year.
So a fix reflects what markets expect rates to do. A tracker reflects what they have actually done.
| Fixed rate | Tracker | |
|---|---|---|
| Monthly payment | Same for the whole term | Rises or falls with base rate |
| Priced from | Swap rates (follow gilts) | Bank of England base rate |
| Early repayment charge | Usually 1ā5% of the balance | Often none, or a small one |
| Typical term | 2, 3, 5 or 10 years | 2 years, or lifetime |
| Suits | Tight budgets, no surprises | Expected lump sums, planned sales |
The cost gap is often smaller than the headline rate suggests
Take an illustrative Ā£150,000 repayment mortgage over 15 years.
At 4.5% the monthly payment is about Ā£1,148. At 5.0% it is about Ā£1,186.
The gap is around Ā£38 a month, or roughly Ā£460 a year. It is not nothing, but it is not the whole decision either.
What the illustration cannot show is what happens in year two if base rate rises by a full point. On a tracker, that gap becomes Ā£80 the other way.
A fix is an insurance premium against rate rises. A tracker is a bet that you will not need the insurance.
Early repayment charges are the real difference for borrowers over 50
Most fixed deals carry an early repayment charge of 1ā5% of the outstanding balance if you clear the loan before the term ends.
On Ā£150,000 that can mean a bill of several thousand pounds for the privilege of paying off your own debt.
Trackers frequently have no such charge, or a small one that expires after a year.
That matters if a pension lump sum is due, a downsizing move is planned, or an inheritance is expected inside the fixed term.
Most fixes do allow overpayments of 10% of the balance a year without penalty, which covers modest windfalls but not a house sale.
Lenders will also assess a term that runs past retirement against pension income, not salary, so check the maximum age before assuming a 25-year deal.
How to decide in three questions
Could you absorb a rise of one percentage point without cutting essentials? If not, fix.
Do you expect to repay a large chunk, or sell, within two years? If so, a tracker or a short fix with low charges.
Do you have a firm view on where rates go next? Neither do the markets, which is why the fix carries a price.
Existing borrowers can usually lock a new deal with their current lender up to six months before the old one ends, without a fresh affordability check.
Doing that, and then switching if something better appears before completion, is the closest thing to a free option in this market.
Run the numbers on the MoneyHelper mortgage calculatorFree, government-backed guidance ā
Check the current Bank of England base rateOfficial Bank of England page ā
