This article is for general information only and does not constitute regulated mortgage advice. Mortgages are subject to status, affordability, and lender criteria. Finance 4 Homes Ltd is an Appointed Representative of Beneficial Ltd. Beneficial Ltd is authorised and regulated by the Financial Conduct Authority.
Choosing between a fixed-rate vs variable-rate mortgage affects more than the interest rate shown on the initial offer.
A fixed-rate mortgage gives you a set interest rate for an agreed period, which makes monthly repayments more predictable during that deal. A variable-rate mortgage can move, meaning your payments may rise or fall while you have it.
Neither structure is automatically better. The differences become clearer when you look at payment certainty, flexibility, what happens when interest rates change, fees, and how long you expect to keep the mortgage.
At Finance 4 Homes, our mortgage advice is tailored to your individual circumstances, including affordability and the mortgage options that may be available to you.
Fixed rate vs variable rate mortgage at a glance
| Feature | Fixed-rate mortgage | Variable-rate mortgage |
| Interest rate | Stays the same during the fixed period | Can rise or fall |
| Monthly repayments | Usually remain predictable during the fixed period, subject to the mortgage terms | Can rise or fall when the applicable rate changes |
| Response to falling rates | Your fixed rate normally stays unchanged | Payments may fall, depending on the type of variable rate |
| Response to rising rates | Your fixed rate normally stays unchanged during the deal | Payments may increase |
| Early repayment charges | Common on fixed deals, particularly during the initial period | Depend on the individual product |
| What happens later | Often moves to the lender’s SVR when the fixed deal ends unless another deal is arranged | Depends on whether it is an SVR, tracker or discounted rate |
The key point is that “variable rate” is an umbrella term. A tracker mortgage and a lender’s standard variable rate do not necessarily move in the same way.
MoneyHelper’s guide to mortgage interest rate options explains the main mortgage-rate structures in more detail.
How does a fixed-rate mortgage work?
With a fixed-rate mortgage, the interest rate stays at the agreed level for a specified period.
Two-year and five-year fixed deals are common, although other fixed periods may be available depending on the lender and product.
During the fixed period, the interest rate does not change, so repayments on a standard repayment mortgage are usually predictable, provided the mortgage terms remain unchanged.
If market interest rates rise after your mortgage starts, the rate on your fixed deal does not normally rise with them during the fixed period.
The trade-off is that the fixed rate remains in place during the agreed period, regardless of whether new mortgage rates subsequently rise or fall.
What happens when a fixed-rate mortgage ends?
A fixed rate does not normally last for the entire mortgage term.
A mortgage may move onto the lender’s standard variable rate, or SVR, when an introductory deal ends if no new deal has been arranged.
The SVR available at that point may be higher or lower than the rate you were paying, so your monthly repayment can change.
If you already have a fixed deal and are considering leaving it before its scheduled end, our guide to remortgaging during a fixed-rate mortgage explains how early repayment charges and switching costs can affect the decision.
How does a variable-rate mortgage work?
With a variable-rate mortgage, the interest rate can change while you have the product.
If the applicable rate rises, your mortgage repayments may increase. If it falls, repayments may decrease.
Exactly what causes the rate to move depends on the type of variable mortgage.
Standard variable rate mortgages
A lender’s standard variable rate, or SVR, is a rate set by the lender.
The lender can change its SVR, subject to the terms and regulatory requirements applying to the mortgage. Although SVRs can be influenced by wider interest-rate conditions, they do not necessarily move by the same amount or at the same time as Bank Rate.
Tracker mortgages
A tracker mortgage follows a specified reference interest rate, commonly the Bank of England’s Bank Rate, plus or minus an agreed margin.
For example, a tracker could be set at Bank Rate plus a particular percentage. If the underlying rate changes, the mortgage rate will generally change in line with the terms of the tracker.
The Bank of England explains how Bank Rate influences borrowing costs, although the rate charged on an individual mortgage still depends on the product’s terms.
Discounted variable-rate mortgages
A discounted variable mortgage usually gives you a discount from the lender’s SVR for a set period.
If the lender’s SVR changes, the rate payable under the discounted mortgage can also change while the agreed discount remains in place.
A larger percentage discount does not necessarily mean a cheaper mortgage because the underlying SVRs can differ between lenders.
What are the main advantages of a fixed-rate mortgage?
The clearest benefit is repayment certainty during the fixed period.
That can make household budgeting easier because changes in market interest rates do not normally alter the mortgage rate during the deal.
Other characteristics may include:
- protection from rate increases during the fixed period;
- a known mortgage rate for an agreed length of time;
- greater certainty over the mortgage element of monthly expenditure.
There are trade-offs.
Fixed deals can include early repayment charges if you repay or switch the mortgage during the fixed period. If new mortgage rates fall, your existing fixed rate will not automatically decrease.
What are the main advantages of a variable-rate mortgage?
Variable mortgages expose the interest rate and repayments to movements in the applicable variable rate.
Where the product rate falls, the amount of interest charged and the monthly repayment may also fall, depending on the mortgage terms.
Early repayment charges and overpayment rules vary between variable-rate products, so the individual mortgage terms still need to be checked.
If the variable rate rises instead, the monthly repayment can increase.
That makes future mortgage expenditure less predictable than under a fixed-rate deal, particularly where the rate is directly linked to an external benchmark such as Bank Rate.
What happens when interest rates change?
Changes in market interest rates affect fixed and variable mortgages differently.
If interest rates rise
A borrower within a fixed-rate period would not normally see the mortgage rate change because of that increase.
Someone with a tracker linked to Bank Rate may see their rate change according to the tracker’s terms.
An SVR may also rise, although the lender determines changes to its SVR rather than it automatically tracking every Bank Rate movement.
If interest rates fall
A fixed-rate borrower will normally continue paying the agreed fixed rate until that deal ends or they switch, subject to the mortgage terms and any applicable charges.
Tracker borrowers may see their rate decrease if the tracked rate falls.
An SVR could also fall, but a lender does not necessarily reduce it by the same amount as a change in Bank Rate.
Is a fixed or variable mortgage cheaper?
There is no reliable rule that one will always be cheaper.
The outcome depends on factors including:
- the interest rates available when you apply;
- lender and product fees;
- how rates change after the mortgage starts;
- how long you keep the deal;
- early repayment charges;
- your mortgage balance and term.
A fixed mortgage with a lower headline rate but a substantial product fee could have a different overall cost from a fee-free deal with a higher rate.
Likewise, a variable mortgage that starts below a fixed deal may not remain cheaper if its rate subsequently increases.
The headline interest rate therefore does not show the complete cost of the mortgage.
What else can affect the overall cost of a mortgage?
Several factors can affect the overall cost of a mortgage, including early repayment charges, overpayment rules, the mortgage term and the follow-on rate.
Early repayment charges
These can be relevant if you expect to move home, repay a substantial amount or change mortgage before an initial deal ends.
Overpayment rules
Some mortgages allow overpayments without charge up to specified limits. The amounts and conditions vary between lenders and individual products.
The mortgage term
The repayment term affects both the monthly payment and the amount of interest that may be paid over time.
The follow-on rate
For an introductory fixed or discounted deal, the mortgage terms should explain what rate is scheduled to apply when that period finishes if no replacement deal is arranged.
What do lenders consider when assessing affordability?
Mortgage type is only one part of an application.
Lenders can consider factors including income, regular expenditure, existing debts, financial commitments, mortgage term and the proposed repayments.
The FCA’s responsible lending requirements set out rules around assessing whether regulated mortgage borrowing is affordable.
A low initial rate therefore does not by itself determine how much you can borrow or whether a particular mortgage will be available.
What factors matter when comparing fixed and variable mortgages?
Predictions about future interest rates are uncertain. Other factors that can affect the comparison include payment certainty, affordability, fees, and the terms of the mortgage.
1. How important is payment certainty?
A fixed rate provides more predictability during the fixed period, while payments on a variable mortgage can change.
2. What would happen if repayments increased?
Variable rates can rise, so the effect of a higher monthly repayment forms part of the wider affordability picture.
3. Are you likely to move or change the mortgage during the deal?
Early repayment charges, portability and other product terms can affect how straightforward or costly it may be to change the mortgage before the initial deal ends.
4. What are the total fees?
A lower headline rate does not necessarily mean a lower overall cost once product fees and other relevant charges are included.
5. How long does the initial deal last?
A two-year fixed deal and a five-year fixed deal provide different periods of rate certainty and different points at which the mortgage may need reviewing.
For first-time buyers comparing mortgage structures as part of their first purchase, our first-time buyer mortgage service explains the wider support available.
Fixed or variable: there is no universal answer
A fixed-rate mortgage generally provides greater payment certainty during the agreed fixed period.
A variable-rate mortgage allows the interest rate and repayments to move according to the terms of that particular product.
Whether a fixed or variable mortgage is appropriate will depend on the borrower’s individual circumstances and the products available.
The mortgage amount, affordability, likely time in the property, product fees, early repayment terms and tolerance for changing payments can all affect the comparison.
Speak to Finance 4 Homes about your mortgage options
Choosing between fixed and variable rates involves more than considering where interest rates might move next.
At Finance 4 Homes, we provide mortgage advice based on your individual circumstances, including affordability and the mortgage options that may be available to you.
If you are buying a property, reviewing an existing deal or approaching the end of your current mortgage rate, visit our Mortgages and Remortgages service to learn more about how we can help you explore your options.
You may be charged a fee for mortgage advice which could be up to 1% of the loan. The precise amount will depend on your circumstances, but we estimate it to be 0.75% of the loan amount. These are illustrative estimates. Your actual fee may differ depending on your circumstances, complexity, credit history and lender requirements.
Not all applicants will qualify. Mortgage products, interest rates and borrowing amounts depend on individual circumstances and lender criteria.
If you are experiencing financial difficulty, free and impartial debt guidance is available from organisations including MoneyHelper, StepChange and Citizens Advice.
Finance 4 Homes Ltd is an Appointed Representative of Beneficial Ltd. Beneficial Ltd is authorised and regulated by the Financial Conduct Authority. This information is for general guidance and relates to the UK consumer mortgage market.
THINK CAREFULLY ABOUT SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP PAYMENTS ON YOUR MORTGAGE.