Guide

Fixed vs variable rate mortgages: which is right for you?

One of the first decisions you will face when applying for a mortgage is choosing your interest rate type. It sounds like a technical detail, but it has a real impact on your monthly budget, your peace of mind, and how much you pay over the long term.

The two main options are a fixed rate mortgage and a variable rate mortgage. Neither is universally better. The right choice depends on your circumstances, your attitude to risk, and what is happening in the broader economy at the time you are borrowing.

Here is what you need to know.

What is a fixed rate mortgage?

With a fixed rate mortgage, your interest rate is locked in for an agreed period, most commonly two, three, or five years, though ten year fixes are available too.

During that period, your monthly payment stays exactly the same. It does not matter whether the Bank of England raises interest rates, whether your lender changes its pricing, or whether the economy has a difficult year. Your payment is fixed, and that is that.

At the end of the fixed period, your mortgage typically rolls onto your lender's Standard Variable Rate. This is almost always higher than the rate you were on, which is why most borrowers remortgage before reaching that point.

What is a variable rate mortgage?

A variable rate mortgage moves up and down over time. There are a few different types.

A tracker mortgage follows the Bank of England base rate directly. If the base rate rises by 0.25%, your mortgage rate rises by 0.25%. If it falls, so does your payment. There is usually a set margin above the base rate (for example, base rate plus 1%), and your payment adjusts automatically whenever the base rate changes.

A discount mortgage offers a reduction on the lender's Standard Variable Rate for a fixed period. So if the SVR is 6% and you have a 1.5% discount, you pay 4.5%. If the SVR changes, your rate changes with it.

The Standard Variable Rate itself is also a variable rate, but it is one to avoid sitting on for long. Lenders set their own SVR independently and can change it at any time. It is almost always higher than the deals available to new customers, and there is no benefit to staying on it.

The case for fixing

For most buyers, particularly first time buyers, a fixed rate offers something genuinely valuable: certainty.

When you are new to homeownership, your finances are often stretched. You have spent months saving, potentially spent thousands on legal fees, surveys, and moving costs, and you are now managing a property for the first time. Knowing exactly what your mortgage payment will be each month, regardless of what happens in the news, removes one significant source of financial stress.

Fixing also protects you if interest rates rise. If you lock in at 4.5% and rates climb to 6% during your fixed period, you continue paying 4.5%. Your neighbours on variable rate deals will be paying more; you will not.

The trade-off is that you are also locked in if rates fall. If you fix at 4.5% and rates drop to 3.5%, you will not benefit from the reduction until your deal ends. And if you want to leave your mortgage early (because you are moving, or because a much better deal becomes available) you will usually face an Early Repayment Charge. These can be substantial, typically between 1% and 5% of the outstanding loan, so it is worth understanding the terms before you commit.

The case for a variable rate

A variable rate mortgage makes most sense when interest rates are expected to fall, or when you value flexibility over certainty.

If you are planning to sell the property in a year or two, or if there is a reasonable chance your circumstances will change in a way that requires you to pay off or change your mortgage, a tracker or discount deal without Early Repayment Charges can give you that freedom. Some tracker mortgages come with no exit penalties at all, which can be valuable if your plans are uncertain.

Variable rates also tend to be lower than fixed rates at the point you take out the mortgage, because you are taking on more risk. If rates remain stable or fall during your mortgage term, you could end up paying less overall than you would have on a fix.

The risk, of course, is the opposite. If rates rise, your payments rise with them. For buyers whose budgets are tight, an unexpected jump in monthly costs can create real pressure.

How do you choose?

There is no formula that gives you the right answer, and anyone who tells you they know exactly where interest rates are headed is guessing. What you can do is make a decision that is right for your situation and your risk tolerance.

Ask yourself a few questions.

• How much financial flexibility do I have? If a rise of £150 a month in your mortgage payment would cause genuine difficulty, a fixed rate gives you protection against that scenario. If you have savings and a stable income and could absorb some fluctuation, a variable rate becomes a more reasonable option.
• How long am I planning to stay in this property? If you expect to sell within three years, paying Early Repayment Charges to exit a five year fix could wipe out any savings you made on the rate. A shorter fix or a tracker with no penalties might serve you better.
• What is the rate environment right now? This does not mean trying to predict the future, but it is worth understanding the context. If rates are high and widely expected to fall, fixing locks you into something that may look expensive in two years. If rates are low by historical standards, fixing in can protect you against a rising environment.
• What would help me sleep at night? Financial decisions are not purely mathematical. If the thought of your payment going up would cause you genuine anxiety, that is relevant information. The certainty of a fixed rate has a real value beyond the numbers.

What about the length of the fix?

If you decide to fix, you then need to choose how long for. The most common options are two and five years, with three and ten year fixes also available.

A two year fix gives you flexibility sooner. You can reassess the market in 24 months and switch to a new deal. The downside is that you pay remortgaging costs more frequently, and there is no guarantee the rates available in two years will be better than what you can get today.

A five year fix gives you longer term certainty and means you are not dealing with the remortgage process as often. Many buyers find this appealing: you set it up, forget about it for five years, and get on with your life. The rate may be slightly higher than a two year deal, but the certainty it buys can be worth the small premium.

Ten year fixes are less common but suit buyers who are confident they will stay in the property long term and want to remove the uncertainty of remortgaging from their lives entirely. The rates are typically higher, and the Early Repayment Charges apply for the full ten years, so flexibility is very limited.

A note on timing

Mortgage rates change constantly. The deals available today may look very different in six months. This is one reason why working with a mortgage adviser is valuable, not just to find the best rate available now, but to help you understand what the market looks like and what trade-offs you are making with different choices.

An adviser can also monitor the market on your behalf. If you are mid way through a fixed term and rates shift significantly, a good adviser will tell you whether it is worth paying an Early Repayment Charge to exit early and remortgage, or whether it is better to sit tight.

If you are not sure which option suits your situation, speaking to an adviser costs nothing and could save you significantly over the life of your mortgage.

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This article is for informational purposes only and does not constitute financial advice. Always speak to a qualified mortgage adviser before making decisions about borrowing.