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Fixed or variable rate mortgage

Choosing the right mortgage can be complicated. Is a variable or fixed mortgage best for you? How much do they cost and can the cost change over time? Understanding the key features of each type of mortgage and which one is most likely to save you money can be tricky. Our guide looks at variable vs fixed-rate mortgages and how to decide which one is right for your circumstances.
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Difference between fixed and variable mortgages

Whilst there are a number of different mortgages available, there are two main types of deal to choose from, fixed-rate mortgages and variable rate mortgages. There are then three types of variable rate mortgage:

Although there are three types of variable rate mortgage and only one type of fixed-rate mortgage, there is a common difference between fixed-rate and all variable rate mortgages.

fixed-rate mortgages fix your interest rate for an agreed period of time. They are not affected by the Bank of England, so the interest rate will not change throughout the duration of the deal. Variable rate mortgages, on the other hand, can change at any time, including during their initial periods.

There are some other key differences between fixed and variable rate mortgages, however, they are dependent on the type of variable rate mortgage you choose. The table below explains this in greater detail to help you to better understand the benefits of variable vs fixed mortgage rates:

Fixed vs Variable mortgage rates

Updated 10 May 2023
Fixed-rate mortgagesVariable-rate mortgages
Tracker-rateStandard variable rate (SVR)Discount-rate
Can the interest payable change during the deal period?NoYesYesYes
When could the rates change?N/AWhen the bank of England (BoE) base rate changes - it will follow any changes exactly. E.g if it goes up 1%, so will your mortgage interest rateLenders change their SVR at their own discretion. Changes can be for both economic and/ or commercial reasonsThis rate is linked to the SVR so will change if and when that does
How are the interest rates set?Lenders set this rate type by estimating how interest rates will change over the set periodLenders initially set this at a chosen percentage (usually 1-2%) above the BoE base rate, but it can then only change if the base rate doesLenders set their own SVR based on a prediction of future market rates, which is why base rate changes won’t necessarily affect itLenders set this rate based on a discount of their own SVR rate, so it may be SVR -1.5% for example
Are fees payable to leave the deal before the end?Yes you will usually have to pay early repayment charges (ERCs) to leave a fixed-term deal. These are typically more expensive the longer you have left until the end dateSome, but not all tracker deals tie you in for the initial period, so if you want to leave the deal before the end of that period, you may have ERCs to pay. Check the individual dealNo, you are not tied to an SVR rate and can leave at any time without paying feesMost discount-rates charge ERCs if you want to leave the deal before the end of the initial period
Do they offer the cheapest rates?*You’ll typically (although not always) pay more for fixed-rates as you’re paying to lock in the certainty that they won’t changeTracker-rates can be one of the cheaper initial rates available, however, bear in mind that they can change during the initial periodSVR rates are usually the most expensive a lender offers, which is why most people tend to remortgage when they fall onto themWhilst they are cheaper than the SVR they are based on, discount-rates won’t always be as cheap as tracker-rates
Major benefits of this type of rateCertainty - easy to budget Interest cannot rise for the duration of the dealMore certainty than other variable rates as dictated by external factor (BoE base rate) Your rate could fall if the base rate fallsYou are not bound to this rate type so can remortgage at any time You will benefit if the SVR happens to go downIt’s cheaper than the SVR You will benefit if the SVR happens to go down
Major negatives of this type of rateYou won’t benefit from falls in interest rates High exit feesWill rise if the base rate does - this could be substantial if there is no cap Can have high exit fees, depending on the deal Collars could mean that you don’t save as much - look out for deals that have themUnpredictability - lenders can raise this at any time Usually the most expensive type of rateIf the SVR goes up, so will your interest rate As this rate is based on the SVR it’s also equally unpredictable

*Please note: access to the cheapest rates will depend on your individual circumstances and individual deal offered, no matter what type of deal you opt for. This is simply to show a comparison of the average initial costs of each rate type

Should you get a variable or fixed-rate mortgage?

The best type of mortgage for you will vary depending on your requirements and circumstances. When looking at whether to choose a fixed or variable mortgage, there are a number of pros and cons to both.

When you’re looking solely at whether to opt for a fixed-rate or not, it’s best to consider how much certainty you need and how close your mortgage repayments take you to your personal budget. 

fixed-rates allow you to budget carefully, so that you know exactly how much to put aside for your mortgage repayments each month for a set amount of time. This means they are probably a sensible choice for those spending a large percentage of their household budget on living costs, that need to ensure they don’t overstretch themselves.

Variable rates of any type are a bit more of a gamble, which means that they are better suited to those with slightly more expendable income. It’s certainly possible that you could save money with a variable rate mortgage if rates fall - but equally, they could rise substantially, so you need to be ready to absorb that extra cost.

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