Fixed-Rate vs Variable-Rate Mortgages: What Is The Difference?

A fixed-rate mortgage has an interest rate that remains unchanged for a set period.

Fixed periods commonly last for two, three or five years, although shorter and longer deals may also be available. At the end of the fixed period, you will usually move onto the lender’s standard variable rate unless you arrange another deal.

Because the interest rate is fixed, your contractual monthly payment will normally remain stable during the deal. This can make household budgeting easier and protect you from an increase in mortgage payments if market interest rates rise.

The interest rate itself is fixed, rather than every aspect of the mortgage. Your payment could still change if you alter the mortgage, change its term, borrow more or make an overpayment that results in the lender recalculating your payments.

The main benefit is certainty.

You know what interest rate you will pay during the fixed period and can budget around a predictable monthly payment. If the Bank of England changes Bank Rate or mortgage pricing increases, your fixed rate will not change during the deal.

This can be reassuring if:

• Your monthly budget has little room for an increase
• You prefer predictable household costs
• You believe rates could rise
• You are buying your first home
• You do not expect to move or repay the mortgage during the fixed period
• Financial certainty is more important to you than short-term flexibility

Fixing your mortgage also means you do not need to monitor every movement in interest rates while the deal is running.

A fixed rate protects you if rates rise, but you will not automatically benefit if mortgage rates fall.

You would usually need to wait until the deal ends or pay an early repayment charge to leave it. The cost of switching could outweigh the saving available from a lower interest rate.

Fixed-rate products commonly include early repayment charges during the initial deal. These are often calculated as a percentage of the outstanding mortgage, so the amount could be substantial.

Your mortgage may be portable, meaning you can apply to transfer the product to another property. However, porting is not guaranteed. You and the new property must still meet the lender’s criteria at the time, and any additional borrowing may be placed on a separate rate.

A fixed rate can therefore be less suitable if you expect to sell, move home or repay a large part of the mortgage soon.

A variable mortgage has an interest rate that can change.

If the rate rises, your monthly mortgage payment is likely to increase. If it falls, your payment may decrease.

There are several types of variable rate, and they do not all work in the same way.

The main examples are tracker rates, discount rates and standard variable rates.

A tracker mortgage follows an external interest rate, most commonly the Bank of England’s Bank Rate, plus or minus a set margin.

For example, a tracker could be priced at Bank Rate plus 0.75 percentage points. If Bank Rate were 4%, the mortgage rate would be 4.75%. If Bank Rate changed to 3.75%, the mortgage rate would normally become 4.5%.

The margin usually remains the same during the tracker period, but the overall mortgage rate can change whenever the rate it tracks changes.

Some trackers have a minimum rate, sometimes called a collar or floor, below which the mortgage rate cannot fall. The product terms should be checked carefully.

A discount mortgage provides a reduction from a lender-controlled variable rate, usually its standard variable rate.

For example, if the lender’s standard variable rate were 6% and the product provided a discount of 1.5 percentage points, the payable rate would be 4.5%.

The discount may remain the same during the deal, but the underlying rate can be changed by the lender. Unlike a Bank Rate tracker, the movements do not necessarily follow changes made by the Bank of England exactly or immediately.

It is therefore important to understand what rate the discount applies to and how the lender can change it.

A standard variable rate, or SVR, is the rate you will commonly move onto after an initial fixed, tracker or discount deal ends.

The lender sets its own SVR and can change it in accordance with the mortgage terms. It may be influenced by Bank Rate and wider funding costs, but it does not have to move by the same amount or at the same time.

An SVR often has no early repayment charge, although the individual mortgage terms must be checked. This can provide flexibility, but the rate may be higher than the lender’s available fixed or tracker products.

Remaining on an SVR can be suitable in some circumstances, but it is worth reviewing the available options before an existing deal ends.

Variable products can offer several possible benefits:

• Your rate and payment may fall if the relevant underlying rate decreases
• The initial rate may sometimes be lower than comparable fixed deals
• Some products have no early repayment charges
• You may have greater freedom to move, sell or repay the mortgage
• You may be able to make larger overpayments without a charge

These features vary considerably. A variable mortgage is not automatically flexible, and some tracker or discount products still have early repayment charges and
overpayment restrictions.

The product conditions matter just as much as the fact that the rate is variable.

The main risk is that the interest rate and monthly payment can increase.

Before choosing a variable rate, it can help to consider how you would cope if the payment rose. A variable deal may initially appear affordable, but your budget should allow for possible increases rather than relying on rates remaining unchanged.

A variable rate may be less suitable if:

• You have limited disposable income
• An increase would put pressure on essential spending
• You strongly prefer predictable monthly costs
• You would worry about changes in interest rates
• The product does not provide the flexibility you need

Interest-rate forecasts can change quickly. Even professional predictions can be wrong, so the decision should not be based solely on trying to time the market.

No. This is a common misunderstanding.

Some variable products allow you to repay the mortgage at any time without an early repayment charge, but others tie you in for an initial period in much the same way as a fixed rate.

Before choosing a mortgage for flexibility, check:

• Whether an early repayment charge applies
• How long the charge lasts
• How the charge is calculated
• The annual overpayment allowance
• Whether the product can be ported
• Any completion or exit fees

If you expect to sell or repay the mortgage soon, these details could be more important than a small difference in the initial interest rate.

If you choose a fixed rate, you will also need to decide how long to fix it for.

A shorter fix may provide an earlier opportunity to review your mortgage. However, you could face another arrangement fee, valuation or legal process sooner, and the rates available when the deal ends are unknown.

A longer fix offers payment certainty for more time and can reduce how often you need to arrange a new deal. In return, you may be committed for longer and could face an early repayment charge if your plans change.

Consider how likely you are to:

• Move home
• Repay the mortgage
• Receive a significant lump sum
• Change employment
• Borrow more
• Experience changes to your household
• Want certainty beyond the next couple of years

The lowest interest rate today is not necessarily the most suitable product over the period you expect to keep it.

When a fixed or introductory variable deal ends, the mortgage will normally move onto the lender’s standard variable rate.

It is sensible to review the mortgage several months before that date. This gives you time to compare:

• A new deal with the existing lender
• A remortgage to another lender
• Fixed and variable options
• Rates, fees and incentives
• Early repayment charges
• Any changes in your circumstances or borrowing needs

The lowest headline rate may not offer the best overall value. A product with a slightly higher rate but no arrangement fee could cost less, particularly on a smaller mortgage.

A variable rate may be worth considering if you can comfortably manage possible payment increases, want to benefit if rates fall or need a product offering greater repayment flexibility.

The decision should reflect:

• Your current and future budget
• Your savings and financial resilience
• Your plans for the property
• How long you expect to retain the mortgage
• The early repayment charges
• The total cost of the available products
• Your attitude towards changing payments

At Crescent Mortgages, we can compare the available fixed and variable products before explaining how the costs, risks and restrictions differ. Our mortgage advice is fee-free, so you will not pay us a broker fee for arranging your mortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage.