Variable or Fixed Mortgage

Picking a mortgage product often starts with choosing between a fixed rate or variable rate agreement. Depending on your circumstances, one could be better for your situation than the other.

Here, we look at the differences between the two types, the costs of each, and what can make one more suitable for you. We also explore why using a broker can help you reach the right decision.

What’s the difference between a fixed and variable rate mortgage?

With a fixed rate, you lock in the interest rate you are charged for a set period (usually between 2-5 years but longer terms are available). With a variable rate, your interest amount can change. How, and when, it will change depends on whether you have a standard variable rate (SVR), a tracker or a discounted variable rate.

Interest is charged on these mortgages in the following ways:

• Tracker: If you pick a tracker, your rate is tied to a specific reference rate – usually the Bank of England base rate. Your lender will add a set extra rate on top for a pre-agreed period.
• Discounted variable rate: If you secure a discounted rate, your lender will take a set percentage off their SVR for a set amount of time. Your rate will change if their SVR changes.
• Standard variable rate (SVR): This is what you would revert to at the end of an introductory rates period. The rate is set by your lender and can change as and when they decide.

The range of products within any of these categories is wide. To help find the most suitable for you, a broker could help you weigh up the following pros and cons against your financial situation.

Fixed-rate mortgages – pros and cons

The biggest benefit to a fixed rate mortgage is the certainty that it provides. By locking in a rate for a set amount of time, you know what your mortgage repayments are going to be. These products are generally fixed between 2-5 years, though some can be fixed for up to a decade or longer

Tracker rate – pros and cons

The rates on this type of product can go up as well as down, so you won’t be able to know definitively what you are paying from one month to the next. While that’s a downside in comparison to a fixed rate, trackers are at least tied to an external marker, usually the Bank of England’s base rate. If you believe the economic environment will see rates go down, and they do, you could save money over time. However, of course, the opposite could end up being true.

You can read more about the benefits and drawbacks in our article on the advantages and disadvantages of tracker mortgages.

Discounted variable rate mortgage – pros and cons

One of the benefits to this type is that rates can be very low to begin with – particularly if you secure a large discount. You can have low monthly repayments, therefore, but the problem is they can easily change. If your provider raises their SVR, which they are allowed to do, your payments will go up too, making budgeting from month to month tricky. Plus your discount is only for a set period of time.

Of course, they can go down if your lender lowers their SVR, so you could make savings in comparison to a fixed-rate product. Overpayments are usually allowed too with no early repayment charges (ERCs).

Standard variable rate – pros and cons

One big downside to reverting onto your lender’s SVR is that they usually have higher rates than a fix. Not only that, you are beholden to what your lender wants to charge, so they can change it as and when they see fit. As an SVR won’t necessarily only go up if the Bank of England raises the base rate, anticipating and budgeting for the future is more difficult.

However, you won’t get penalised with early repayment charges if you want to make overpayments. In some situations, paying higher interest but large lump sums off intermittently could work out cheaper over the lifespan of a mortgage. For instance, you could be expecting a large bonus with which you plan to pay off a big chunk or all of your outstanding amount.

Is it better to have a variable or fixed rate mortgage right now?

The answer to this question is always dependent on your financial situation. There is no one right answer for everybody.

Interest rates have risen quite a lot recently as the Bank of England has had to keep inflation in check. That means mortgage repayments have increased too – regardless of the type of deal being chosen.

As a result, some have opted for fixed rates to protect against these rises. However, fixed-rate mortgages can be more expensive than trackers or discounted rates – particularly as and when the base rate starts to come back down. So, if you need to buy a house right now, it could be that you can only afford a mortgage with a variable rate. Or, you may be in a position where it is likely you want to pay off large lump sums – in which case, the early repayment charges on some fixed-rate mortgages may outweigh its benefits.

Is a 2-year or 5-year fixed rate better?

The best option will entirely depend on your situation and your preferences. You may want the security of knowing exactly what your repayments will be for as long as possible without tying yourself down to one rate for too long. In this case, the 5-year deal may be the best way forward. However, the 2-year option gives you more flexibility to change without incurring ERCs.

How a broker can help you decide which is best for you

Getting the right product is important as it can minimise your mortgage repayments, maximise the amount you can borrow and ensure that you are not at risk of financially overreaching in the future.

A broker can help you find the best product for your circumstances. They’ll weigh up all elements of your financial situation and determine not only whether a fixed-rate or variable-rate mortgage is best, but which lender offers the best terms for you too. Importantly, they’ll only ever recommend mortgages for which you are eligible, helping improve your chances of being approved the first time – minimising the impact on your credit score.

How do the costs of each type compare?

The average product fees for fixed-rate mortgages can be anything between £500 and £1,000, so they’re not a cost to disregard in your mortgage calculations. In some situations, the fee could make a variable-rate mortgage more attractive.

Plus, ERCs on fixed-rate mortgages can be between 1-5% of the outstanding loan amount, on average. Being charged for making early repayments can be costly therefore and can make it pointless to pay off a lump sum or your outstanding amount. (Though remember, some fixed-rate mortgages do come with the ability to pay off 10% of the initial loan amount each year without incurring charges.)

Costs for variable rate mortgages such as tracker products or discount mortgages tend to be lower than fixed rates – for example, SVRs don’t have product fees. However, with SVRs in particular, the rate can be much higher than a fixed rate, often making it worth paying the product fee – especially if you don’t intend to make large overpayments.

Get matched with a broker experienced in both fixed-rate and variable mortgages

Getting help to ensure you get the best mortgage for you is an effective way to secure a product that minimises your monthly repayments while being approved for the loan amount you need.

A broker, with all their years of experience, will have the knowledge to recommend whether a variable-rate mortgage or a fixed-rate mortgage is appropriate for your situation. Plus, they’ll be able to advise which lender will offer you the best terms. Additionally, they can make your entire application process smoother and help ensure you are approved the first time.

Our free, no-obligation broker matching service will connect you with the best advisor for you. Call us on 0808 189 2301 or enquire with us today so we can put you in touch with a specialist.