Fixed vs variable rate mortgages: A complete guide

When you take out a mortgage, one of the most fundamental choices you make is whether your interest rate will stay the same for a period of time or whether it can change. This decision affects your monthly payments, your flexibility, and how exposed you are to movements in the wider interest rate environment. Understanding how each type works, and what the differences mean in practice, is the starting point for making a choice that fits your circumstances.

What a fixed-rate mortgage is

A fixed-rate mortgage locks your interest rate at a set level for an agreed period. The most common fixed terms are two years, three years, five years, and ten years, though other lengths exist. During the fixed period, your monthly mortgage payment stays the same regardless of what happens to the Bank of England base rate or interest rates in the wider economy. If rates rise, your payment does not go up. If rates fall, your payment does not go down either.

At the end of the fixed period, the mortgage typically moves onto the lender's standard variable rate unless you remortgage to a new deal. Standard variable rates are generally higher than fixed or tracker rates, so most borrowers choose to remortgage at the end of the fixed term rather than remain on the SVR.

Most fixed-rate mortgages carry early repayment charges if you want to leave the deal before the fixed period ends. The size and structure of these charges varies between lenders and products.

What a variable-rate mortgage is

Variable-rate mortgages come in several forms, and the differences between them matter.

A tracker mortgage follows the Bank of England base rate at a set margin above it. If the base rate rises by a quarter of a percentage point, the tracker rate rises by the same amount. If the base rate falls, the tracker rate falls. This means your monthly payment can go up or down during the mortgage term. Tracker deals are often more flexible than fixed deals, with some carrying no early repayment charges.

A standard variable rate is the lender's own rate, which the lender can change at any time and for any reason. SVRs are not directly tied to the base rate, though they often move broadly in response to it. SVRs are typically the most expensive option and are most often the rate that borrowers fall onto by default at the end of a fixed or tracker deal rather than a rate borrowers actively choose.

A discount mortgage offers a set reduction off the lender's SVR for a period. Because the SVR can change, the payment on a discount mortgage can also change even during the discount period.

The key practical differences

The central trade-off between fixed and variable is certainty against flexibility. A fixed-rate mortgage gives you a predictable monthly payment for the duration of the term. You know exactly what you will pay and can budget around it. A tracker or other variable deal means your payment can change, which may be a benefit if rates fall, but creates uncertainty if they rise.

Flexibility around overpaying, leaving early, or switching products is generally greater with tracker mortgages than with fixed ones, though the specifics vary considerably between products and lenders.

What to think about when choosing

The questions most relevant to this decision are personal rather than universal. How much room do you have in your monthly budget if your payment were to increase? How long do you expect to stay in the property? Is there a possibility you will want to pay off a large sum ahead of schedule or remortgage before the deal ends? How important is it to you to know exactly what your housing costs will be each month?

A whole-of-market mortgage broker can compare the full range of available products against your specific circumstances and help identify which structure is most appropriate for your situation.

Talk to our team about your mortgage options