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- How do fixed-rate mortgages work?
- How do variable rate mortgages work?
- Fixed vs variable mortgages
- Other differences between fixed and variable mortgages
- Fixed rate or variable mortgages: pros and cons
- Is it better to get a fixed or variable mortgage now?
- Should I choose a fixed or variable rate mortgage?
When you take out a mortgage, you’ll need to choose between either a fixed or variable rate. Fixed-rate mortgages remain the most popular option among borrowers, but does this mean that variable rates are being overlooked?
Read on to find out how to decide if a fixed or variable mortgage will be better for you.
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How do fixed-rate mortgages work?
With a fixed-rate mortgage, the interest rate you pay will stay the same for the time you’ve fixed. Typically this will be for either two or five years, although shorter, longer and terms in between are also usually available.
Because the interest rate doesn’t change, this means your monthly mortgage repayment will also stay the same for that fixed period.
Once the fixed-rate period finishes, you will move to the lender’s standard variable rate (SVR), which tends to be higher. For this reason, many borrowers remortgage to a new deal at this point so that they don’t pay the SVR.
» MORE: Compare remortgage deals
How do variable rate mortgages work?
With a variable rate mortgage, the interest rate you pay can change. And if this happens, your monthly repayments are likely to change too. The rates on variable rate mortgages tend to move as the Bank of England base rate moves, though this can depend on the particular variable mortgage you have. The three main types are:
- a tracker mortgage, where the interest rate you pay follows changes in the base rate. For example, if the base rate goes up by 0.25%, so too will the interest rate on your mortgage, meaning your monthly repayment will rise as well.
- a standard variable rate, which is essentially a default rate set by your lender that you move onto when an initial deal ends. Crucially, unlike a tracker mortgage, lenders can change their SVR whenever, and by how much, they want. Movement in the base rate may lead to an SVR change, but it doesn’t have to. They also tend to be higher than other rates.
- a discount rate mortgage, where the rate you pay runs at a discount from the SVR set by your lender. For example, if your lender’s SVR is at 5% and your mortgage runs at a 2% discount, your mortgage rate will be 3%.
Generally, the variable rate period on a tracker and discount mortgage runs for a set period, typically two or five years, after which you’ll move onto your lender’s SVR. However, some lenders offer lifetime tracker mortgages, which run for the entirety of your mortgage term.
Fixed vs variable mortgages
Whether a fixed-rate or variable rate mortgage is best suited to you will mainly depend on your financial situation and how much risk you can take. If you cannot afford the risk that your mortgage repayments may rise, a fixed-rate mortgage will give you peace of mind that your mortgage rate won’t change for the period of time you fix.
But if you could comfortably afford higher repayments should interest rates rise, a variable rate mortgage, such as a tracker mortgage, may offer access to lower interest rates initially, and provide the opportunity for your repayments to fall in the future.
A mortgage interest rate calculator can help you work out what will happen to your monthly mortgage repayments if interest rates change.
» MORE: See the latest mortgage rates
Other differences between fixed and variable mortgages
Another key difference between fixed-rate and variable rate mortgages relates to a fee you have to pay should you want to switch deals or repay your mortgage in part or in full earlier than expected, called early repayment charges. Early repayment charges are usually calculated as a percentage of your outstanding loan, so can sometimes run into thousands of pounds.
Most fixed-rate mortgages will have an early repayment charge that applies during the initial fixed-rate period. The percentage payable may be as high as 5% at the start, but will often decrease as you get closer to the end of your deal. There’ll be no charge to pay at all once your fixed rate period is at an end.
On the other hand, many variable mortgages do not have early repayment charges. As a result, it could save you money if you want to make large overpayments, repay your mortgage early, or change to a new deal, perhaps because you’re moving home.
If you have a variable mortgage without an early repayment charge and interest rates start to rise, it could also allow you to switch to the relative security of a fixed-rate mortgage without having to pay a fee for leaving for your current deal.
» MORE: Should you overpay on your mortgage?
Fixed rate or variable mortgage: pros and cons
| Fixed-rate mortgages | Variable rate mortgages | ||
| Pros | Cons | Pros | Cons |
| Protects against rate rises | Won’t benefit if rates fall | Will benefit if rates drop | The risk that rates rise |
| Peace of mind repayments won’t change | Rates may be higher than on variable deals | Initial rates may be lower than on fixed deals | Uncertainty over repayments |
| Can help with budgeting | Early repayment charges if want to exit deal | May not have early repayment charges | May be difficult to budget |
Is it better to get a fixed or variable mortgage now?
Your personal circumstances are always key, but there may be times when it may make more sense to get a fixed-rate mortgage ahead of a variable rate mortgage, and vice versa.
A fixed-rate mortgage may have the edge if:
- your existing fixed-rate deal is about to end and you want ongoing certainty over your mortgage repayments.
- you have a variable rate mortgage but think the base rate of interest may be about to rise.
- interest rates have been dropping and you don’t believe they’ll fall much further.
A variable rate mortgage may have more to offer if:
- you believe the base rate could be cut or will at least hold steady going forward.
- variable rates are cheaper than fixed rates, and need your repayments to be as low as possible.
- there’s a chance you may move home, and a variable mortgage without early repayment charges would mean you can exit your deal without penalty.
- you want the flexibility available from a variable mortgage with no early repayment charges to overpay, pay off your mortgage completely, or move to a different deal, penalty-free.
That said, a variable rate mortgage should only be considered a viable option if your finances are such that you could carry on living comfortably if interest rates, and therefore your mortgage repayments, were to rise.
Should I choose a fixed or variable rate mortgage?
Ultimately, the right type of mortgage for you will come down to your own circumstances and attitude towards risk. If you are risk averse, and want the certainty of knowing what your mortgage will cost you each month, then a fixed-rate mortgage is likely to be more suited to you.
However, if you are happy to accept the risk of higher payments in future to secure lower repayments at the outset ‒ and can afford those higher payments should rates rise ‒ then a variable mortgage may be an option for you to consider.
Talking to a mortgage lender or getting mortgage advice is a good idea if you’re in any way unsure. If you want to discuss your mortgage options, NerdWallet has partnered with L&C, the UK’s leading fee-free mortgage broker, to offer you expert advice.
» MORE: Best mortgage lenders
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