When choosing a mortgage, one of the main decisions is how your interest rate will work.
Two common choices are fixed rate and variable rate mortgages.
A fixed rate gives you more certainty. In contrast, a variable rate can move up or down.
Neither option is always better. Therefore, it helps to understand how each one works.
What Is a Fixed Rate Mortgage?
A fixed rate mortgage has an interest rate that stays the same for an agreed period.
For example, you might choose a rate that is fixed for:
- 2 years
- 3 years
- 5 years
- 10 years
During this period, your interest rate will not normally change.
As a result, your monthly mortgage payment should stay the same if nothing else affecting the payment changes.
A Simple Fixed Rate Example
Suppose you borrow £180,000.
You choose a mortgage with an interest rate fixed at 4.5% for five years.
During those five years, the fixed rate remains at 4.5%.
Therefore, changes in general interest rates will not normally change your mortgage rate during the fixed period.
This can make budgeting easier.
What Happens When the Fixed Rate Ends?
A fixed rate does not usually last for the whole mortgage term.
For example, you might have a 25-year mortgage with a rate fixed for the first five years.
When the five years end, you will normally move onto another rate set out by your lender. This is often the lender’s Standard Variable Rate (SVR).
However, you do not necessarily have to stay on that rate.
You may be able to:
- choose another deal with your current lender
- remortgage to another lender
Therefore, it is useful to review your mortgage before the fixed period ends.
What Are the Benefits of a Fixed Rate?
The main benefit is certainty.
You know the interest rate that will apply during the fixed period.
Therefore, it is easier to plan your household budget.
A fixed rate can also protect you from rising interest rates during the deal.
For example, general mortgage rates could rise while your own rate stays fixed.
What Are the Drawbacks of a Fixed Rate?
A fixed rate can also have disadvantages.
If mortgage rates fall, you may continue paying your agreed fixed rate.
Also, fixed mortgages often have Early Repayment Charges (ERCs) during the fixed period.
Therefore, leaving the mortgage early could be expensive.
You should check these charges before choosing a deal.
What Is a Variable Rate Mortgage?
A variable rate mortgage has an interest rate that can change.
Therefore, your mortgage payments may also change.
If the rate rises, your payments may increase.
On the other hand, if the rate falls, your payments may decrease.
However, the way the rate changes depends on the type of variable mortgage.
What Is a Standard Variable Rate?
A Standard Variable Rate (SVR) is a rate set by the mortgage lender.
Many borrowers move onto an SVR when their initial mortgage deal ends.
The lender can change this rate.
However, an SVR does not normally track the Bank of England base rate in a fixed way.
For example, a change in the base rate does not necessarily mean the lender will change its SVR by exactly the same amount.
What Is a Tracker Mortgage?
A tracker mortgage follows a set financial rate, usually the Bank of England base rate.
For example, your mortgage could be:
Bank of England base rate + 0.75%
If the base rate were 4%, your mortgage rate would be:
4% + 0.75% = 4.75%
If the base rate later fell to 3.5%, the mortgage rate would become:
3.5% + 0.75% = 4.25%
However, if the base rate increased to 4.5%, your rate would become:
4.5% + 0.75% = 5.25%
Therefore, your mortgage costs can move in either direction.
What Is a Discount Mortgage?
A discount mortgage offers a reduction from another rate, often the lender’s SVR.
For example:
Lender’s SVR: 6%
Discount: 1%
Mortgage rate: 5%
However, if the lender changes its SVR, your mortgage rate may also change.
Therefore, the size of the discount may stay the same while the actual rate moves.
Fixed vs Variable: The Main Difference
The main difference is certainty.
With a fixed mortgage:
Your rate stays the same for the fixed period.
With a variable mortgage:
Your rate can change.
Therefore, the choice partly depends on how comfortable you are with changes in your monthly mortgage costs.
What Happens If Interest Rates Rise?
A fixed rate can protect you from rate rises during the fixed period.
For example, suppose your mortgage is fixed at 4%.
If new mortgage rates later rise to 5%, your fixed rate normally remains at 4% until the deal ends.
A variable mortgage may work differently.
Its rate could rise. Therefore, your monthly payments could also increase.
What Happens If Interest Rates Fall?
This is where a variable mortgage may benefit.
If the rate linked to your mortgage falls, your mortgage rate may also fall.
As a result, your payments may become lower.
However, someone on a fixed rate will normally continue paying the agreed rate until the fixed period ends.
Therefore, fixing gives you certainty, but it can also mean missing out on falling rates.
Can You Leave a Fixed Mortgage Early?
Usually, yes. However, you may have to pay an Early Repayment Charge.
For example, suppose you still owe:
£180,000
and your Early Repayment Charge is:
2%
The charge could be:
£180,000 × 2% = £3,600
Therefore, check the mortgage terms carefully.
This is especially important if you may move home or repay the mortgage early.
Are Variable Mortgages More Flexible?
Some variable mortgages have fewer Early Repayment Charges.
This can make them more flexible.
For example, you may be able to make larger overpayments or leave the mortgage more easily.
However, this is not true of every variable mortgage.
Therefore, always check the terms of the individual product.
How Long Should You Fix For?
There is no single fixed period that suits everyone.
A shorter fix can give you the chance to review your mortgage sooner.
However, you may need to arrange another deal sooner too.
A longer fix gives you more certainty.
On the other hand, it can keep you tied to the same rate for longer.
Therefore, consider your future plans as well as today’s interest rate.
Think About Your Future Plans
Before choosing a mortgage, consider what may change.
For example:
Are you likely to move home?
Could your income change?
Do you plan to make large overpayments?
Could you repay the mortgage early?
How important is payment certainty?
These questions can help you decide which features matter most.
What If You Plan to Move Home?
A long fixed period may seem attractive.
However, you may decide to move before it ends.
Some mortgages can be ported to another property. This means you may be able to take the mortgage deal with you.
However, porting is not automatic.
You normally need to meet the lender’s rules at the time.
Therefore, do not choose a long fixed period simply because you assume you can take it with you.
Compare More Than the Interest Rate
The mortgage with the lowest rate is not always the cheapest.
You should also consider:
- product fees
- Early Repayment Charges
- valuation fees
- incentives
- mortgage term
- overpayment rules
- flexibility
For example, one mortgage may have a lower rate but a large product fee.
Another may have a slightly higher rate but no product fee.
Therefore, compare the overall cost.
A Simple Comparison
Suppose you are comparing two mortgages:
| Fixed Mortgage | Variable Mortgage | |
|---|---|---|
| Starting rate | 4.5% | 4.2% |
| Can rate change? | No, during fixed period | Yes |
| Payment certainty | Higher | Lower |
| Benefit if rates fall | Usually no immediate benefit | Possible |
| Protection if rates rise | Yes, during fixed period | No |
| Early repayment charges | Often apply | Depends on deal |
The variable mortgage starts with a lower rate.
However, this does not mean it will remain cheaper.
Likewise, the fixed mortgage costs more at the start. However, it gives greater certainty.
Can You Predict Which Will Be Cheaper?
Not with certainty.
Future interest rates are unknown.
Rates may rise, fall or remain similar.
Therefore, choosing between fixed and variable rates should not depend only on trying to predict the market.
Instead, consider how you would cope if your mortgage payment increased.
Could You Afford a Rate Rise?
This is particularly important with a variable mortgage.
Ask yourself what would happen if your monthly payment increased.
Would the new payment still fit comfortably within your budget?
If a small increase would cause financial difficulty, payment certainty may be more important to you.
However, this does not automatically mean a fixed mortgage is the right choice.
The full mortgage still needs to be considered.
Fixed Rate Mortgages May Suit People Who Want Certainty
A fixed mortgage may appeal if you want:
- predictable payments
- protection from rate rises
- easier budgeting
- certainty for a set period
However, you may have less flexibility.
Also, you may not benefit if rates fall.
Variable Rate Mortgages May Suit People Who Want Flexibility
A variable mortgage may appeal if you are comfortable with changing payments.
You may also benefit if rates fall.
Some variable deals can offer greater flexibility too.
However, rates can rise.
Therefore, make sure higher payments would remain affordable.
What Should You Compare?
Before choosing, check:
Interest rate
Monthly payment
Product fee
Length of the deal
Early Repayment Charges
Overpayment rules
What happens when the deal ends
Any other mortgage fees
Then consider how these fit your own plans.
The Key Point
The main difference between fixed and variable mortgages is simple.
A fixed rate gives you greater certainty.
A variable rate can rise or fall.
Neither is always better.
Therefore, do not choose a mortgage simply because you think interest rates are about to move.
Instead, consider the overall cost, flexibility and risk.
Most importantly, think about whether you could comfortably afford your mortgage if your payments increased.
The best mortgage is not simply the one with the lowest rate today. It is one that fits your finances and plans for the years ahead.