Fixed mortgages vs variable rate mortgages: which is right for you?
Working out the right type of mortgage for you will help you keep your costs low. But how do you choose between fixed rate and variable mortgages?
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If you’re looking for a new mortgage, whether because you’re hoping to buy a property or need to remortgage, then one of the big considerations is whether to go for a fixed rate or variable rate mortgage.
The interest rate charged on your mortgage will be one of the main factors not only in the size of your monthly repayments but also in how much the loan costs you to pay off in the long run.
But, there’s more to picking a mortgage than simply plumping for the product with the lowest interest rate ‒ you also need to work out whether your circumstances will be best supported through a fixed rate mortgage or a variable rate mortgage.
So what are the pros and cons of each?
The pros of fixed rate mortgages
The big selling point of a fixed rate mortgage is the fact that you have certainty over how much your mortgage will cost you each month.
It doesn’t matter what is happening with the Bank of England’s base rate, or the economy generally ‒ your mortgage repayments won’t change for as long as your fixed rate lasts.
This is a real boost when it comes to budgeting. We have all seen how swiftly the cost of regular household spending, like food and energy, has rocketed over the last year or so. Knowing precisely what you’ll be paying on the mortgage each month ‒ which after all is likely the largest single expenditure you’ll face each month ‒ is incredibly helpful.
You can secure that certainty for a wide range of periods too, starting at two years but moving all the way up to 10 years. If you are confident you won’t be moving house any time soon, that can be extremely useful.
What’s more, the interest rates charged on fixed rates have been falling of late. In the last couple of weeks, many lenders have dropped their rates, to the point that there are now some five-year fixed rates costing less than 4%. While that is more costly than you would have paid a year ago, it is far cheaper than the rates seen in the aftermath of the mini-Budget last year.
The cons of fixed rate mortgages
The main downside to fixed rate mortgages is that the certainty over the cost of your monthly payments comes at a premium. The rates charged on fixed rate deals are notably higher than you would get from a mortgage with a variable interest rate, and that means higher monthly repayments.
Now, that might pay off. It may be that the base rate increases sharply over the term of your fixed rate period, to the point that the fixed rate mortgage would actually work out cheaper. But, the opposite is also true ‒ unless the base rate moves by that amount, then you will have paid more overall in order to know precisely what your mortgage payment would be each month.
The difference between the rates on fixed and variable rate mortgages became even more pronounced following the mini-Budget. That sparked a crisis in the financial markets and meant that the pricing of fixed rate mortgages was dramatically increased.
While fixed rate mortgage costs have dropped of late, it’s important to bear in mind that they are still substantially higher than you would have paid just a few months ago.
The pros of variable rate mortgages
An alternative option to fixed rate mortgages comes in the form of a variable rate deal. As the name suggests, with these forms of mortgage the interest rate charged on your debt can change over the course of your deal.
It’s important to note that there are two different forms of variable mortgage products: tracker mortgages and discount mortgages.
Trackers are simple to understand, in that the rate you pay is tied to the bank base rate. When it moves, so too does the rate charged on your mortgage. So if your mortgage follows the base rate plus 2% then at the time of writing you’ll pay 6%. If the base rate increases from 4% to 4.5%, then your repayment rate will move by the same amount to 6.5%.
Then there are discount mortgages. These don’t follow the bank base rate; instead they are a slightly lower rate than the lender’s own standard variable rate (SVR). The SVR is what you move onto at the end of your initial fixed or variable rate, and crucially can be changed by the lender at any point, no matter what is happening with the base rate.
The big positive to variable rate mortgages is that they are cheaper, at least at the outset. The interest rates charged on variable rate deals are lower than those you will get with a fixed rate mortgage, which translates into lower monthly mortgage repayments. Keeping the cost of your mortgage lower is always useful, but it’s even more attractive at a time when household finances are under pressure.
Variable rate mortgages are generally somewhat easier to escape should circumstances change, compared with fixed rate mortgages. Variable rate mortgages often do not have an early repayment charge, meaning that you can switch to a different product without having to pay an exit fee. This is particularly useful if the rates charged on the variable deal start to increase at an uncomfortable rate, and you want to instead move to a deal that offers a little more certainty over repayments.
The cons of variable rate mortgages
The big downside to variable rate mortgages is of course the fact that your mortgage repayments can change at any time. Sure, that might mean that your repayments go down, but equally, it can mean that your monthly bill increases.
As a result, while a variable mortgage is going to be cheaper at the beginning, that could quickly change and mean you end up paying more overall. This can make it challenging to keep on top of your household budget, particularly if it’s a time of high inflation as we are experiencing at the moment.
The scale of those increases can be unpredictable too. With a tracker mortgage, you know that your mortgage rate will only move by the same amount the base rate does. However, with a discount mortgage you could find that your rate moves more significantly than the base rate ‒ in fact, the lender can adapt that rate at any time it likes, even if the base rate has not changed.
Fixed rate vs variable rate mortgages: which is the right choice for you?
There’s no simple answer to the question of fixed rate vs variable rate mortgages. It will ultimately come down to your own circumstances and attitude to risk.
If you are the sort of person that values certainty over your outgoings and can afford the premium that comes with selecting a fixed rate mortgage, then opting for a fixed deal is going to be the right choice. The next question will be determining how long you want to fix the rate.
However, if you are determined to keep costs as low as possible and are confident that base rate will not be increasing much over the next couple of years, then some form of variable rate mortgage may be the correct product for you.
From here you will need to determine whether you want a rate that tracks the base rate precisely, or if you are willing to roll the dice with a variable rate mortgage where the lender has control over when ‒ and by how much ‒ it increases.
John Fitzsimons has been writing about finance since 2007, and is a former editor of Mortgage Solutions and loveMONEY. Since going freelance in 2016 he has written for publications including The Sunday Times, The Mirror, The Sun, The Daily Mail and Forbes, and is committed to helping readers make more informed decisions about their money.
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