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Understanding Fixed vs Variable Rates
Fixed, tracker or variable? Compare how each mortgage type works, how payments could change, two vs five-year fixes and what happens when your deal ends.
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The below article has information contained within that was correct at the time of publication but is subject to change. This is for information purposes only and does not constitute advice.
Understanding Fixed vs Variable Rate Mortgages
Written by Doug Miller, Director at Lansdown Financial Services.
Doug Miller is a mortgage broker and co-founder of Lansdown Financial Services, based in Bath, quoted in 30+ news articles including the Guardian, Sky News, This is Money and the Sun.
Choosing between a fixed-rate and variable-rate mortgage is one of the most important decisions you’ll make when arranging your mortgage.
A fixed-rate mortgage provides certainty over your interest rate and normal monthly repayments for an agreed period. A variable-rate mortgage works differently: the interest rate can change, meaning your payments could increase or decrease.
Neither option is automatically better.
The right choice depends on your financial circumstances, future plans, how comfortable you are with changing mortgage payments and the products available.
While it’s tempting to make the decision based on where you think interest rates are heading, predicting future mortgage rates is extremely difficult.
We’d rather focus on finding a mortgage that works for you, whatever happens to interest rates.
Key Points: The Short Version
Don’t have time to read the full article? Here are the six key things you need to know.
- Fixed-rate mortgages provide payment certainty: Your interest rate and normal monthly repayments remain unchanged throughout the agreed fixed period, commonly two or five years.
- Variable-rate mortgages can change: Your mortgage interest rate and monthly repayments may increase or decrease depending on the product and wider interest rate movements.
- Tracker mortgages typically follow Bank Rate: They usually track the Bank of England’s base rate plus an agreed margin, meaning rate changes can affect your repayments.
- Fixed mortgages protect against rate increases: However, you won’t automatically benefit if new mortgage rates fall during your fixed period.
- Flexibility varies between products: Fixed mortgages often include early repayment charges, while some variable mortgages allow more flexible overpayments or switching.
- The lowest rate isn’t always the best mortgage: Product fees, early repayment charges, mortgage terms and your future plans all need to be considered.
The bottom line: A fixed-rate mortgage may be more suitable if predictable monthly payments are your priority. A variable-rate mortgage may appeal if you’re comfortable with interest rate changes and value potential flexibility. The right decision depends on your circumstances rather than trying to predict the mortgage market.
The Full Guide: Fixed vs Variable Rate Mortgages Explained
Want to understand the detail? Below, we explain how fixed and variable mortgages work, their advantages and disadvantages, what happens when interest rates change and how to decide which may be appropriate for you.
In This Guide
- What a fixed-rate mortgage is
- How variable-rate mortgages work
- Fixed versus variable mortgage comparison
- How interest rate changes affect repayments
- Two-year versus five-year fixed mortgages
- Early repayment charges and overpayments
- What happens when your fixed rate ends
- How to decide which mortgage is right for you
- Frequently asked questions
What Is a Fixed-Rate Mortgage?
A fixed-rate mortgage gives you an agreed interest rate for a set period.
Two-year and five-year fixed-rate mortgages are particularly common, although other fixed periods are available.
During the fixed-rate period, your interest rate doesn’t change, regardless of movements in the Bank of England base rate or wider mortgage market.
For example, imagine you arrange a five-year fixed-rate mortgage at 4.5%.
Your mortgage interest rate would normally remain at 4.5% throughout those five years, even if new mortgage rates subsequently increase or decrease.
This makes budgeting easier because you know what your normal monthly mortgage payment will be.
What Happens If Interest Rates Rise?
If you’re already on a fixed-rate mortgage, an increase in Bank Rate or newly available mortgage rates won’t normally affect your agreed interest rate.
That can provide valuable certainty, particularly if your household budget has limited capacity to absorb higher repayments.
However, the protection only lasts for the agreed fixed period.
When your deal expires, the mortgage rates available could be higher than the rate you’ve been paying.
What Happens If Mortgage Rates Fall?
Your fixed rate doesn’t automatically decrease.
If you secured a mortgage at 4.5% and comparable new mortgage products later became available at 3.5%, you’d normally continue paying your original fixed rate until the deal ends.
It may be possible to switch early, but doing so could trigger an early repayment charge.
The main benefit of fixing is certainty, rather than a guarantee of having the cheapest mortgage throughout the fixed period.
What Is a Variable-Rate Mortgage?
A variable-rate mortgage has an interest rate that can change during the mortgage term.
If the interest rate increases, your monthly repayments could rise.
If the rate decreases, your monthly repayments may fall.
However, not all variable mortgages work in the same way.
Two common examples are tracker mortgages and Standard Variable Rate mortgages.
What Is a Tracker Mortgage?
A tracker mortgage typically follows another interest rate, most commonly the Bank of England Bank Rate, with an agreed margin added on top.
For example, a mortgage might track:
Bank Rate + 0.75%
| Bank of England Bank Rate | Example tracker mortgage rate |
|---|---|
| 3.50% | 4.25% |
| 4.00% | 4.75% |
| 4.50% | 5.25% |
Illustrative tracker mortgage assuming a margin of 0.75 percentage points above Bank Rate, excluding any applicable minimum rate floor.
If Bank Rate decreases by 0.5 percentage points, the mortgage rate would generally fall by the same amount.
If Bank Rate increases, the tracker mortgage rate would generally increase accordingly.
The exact timing depends on the mortgage terms, and some products include minimum interest rate floors.
Tracker mortgages can sometimes provide greater flexibility regarding early repayment charges or overpayments, although this varies between lenders and products.
What Is a Standard Variable Rate Mortgage?
A Standard Variable Rate, usually called an SVR, is an interest rate set by an individual mortgage lender.
Unlike a tracker mortgage, it doesn’t normally follow Bank Rate according to a fixed mathematical formula.
The lender can change its SVR in accordance with the mortgage terms.
Borrowers commonly move onto their lender’s SVR when an existing fixed-rate or introductory mortgage deal ends and they haven’t arranged another product.
SVRs are often more expensive than other mortgage deals available to eligible borrowers.
However, they can sometimes offer greater flexibility, particularly where there are no early repayment charges.
If you’re currently on your lender’s SVR, it’s worth comparing your available options rather than assuming you need to remain there.
Fixed vs Variable Rate Mortgages: What’s the Difference?
The main difference is certainty versus exposure to changing interest rates.
| Feature | Fixed-rate mortgage | Variable-rate mortgage |
|---|---|---|
| Interest rate | Stays the same during the fixed period. | Can increase or decrease. |
| Monthly repayments | Normally remain unchanged during the fixed period. | Can change when the mortgage rate changes. |
| If interest rates rise | Your fixed rate remains protected until the deal ends. | Your mortgage rate may increase, depending on the product. |
| If interest rates fall | Your fixed rate doesn’t automatically decrease. | You may benefit from lower payments. |
| Early repayment charges | Common during the fixed period. | Vary; some variable products have fewer restrictions. |
| Budgeting certainty | Greater certainty over payments. | Less certainty because payments may change. |
| Who might prefer it? | Borrowers prioritising predictable mortgage payments. | Borrowers comfortable with payment changes or seeking particular flexibility. |
Neither mortgage type is universally better.
The appropriate choice depends on how you value payment certainty, the risk of increasing repayments and the features of the individual products.
How Much Could Your Mortgage Payments Change?
One of the most important considerations when choosing a variable-rate mortgage is understanding how higher interest rates could affect your monthly payments.
For example, imagine you have a £250,000 repayment mortgage over 25 years.
| Mortgage interest rate | Approximate monthly repayment | Difference compared with 4% |
|---|---|---|
| 3.00% | £1,186 | £134 less |
| 4.00% | £1,320 | — |
| 5.00% | £1,461 | £141 more |
| 6.00% | £1,611 | £291 more |
Illustrative figures assuming a £250,000 capital repayment mortgage over 25 years, with a constant interest rate and no fees. Figures are rounded and don’t represent current mortgage offers.
In this example, an increase from 4% to 6% would add approximately £291 to the monthly mortgage repayment.
That’s an additional £3,492 per year, based on the rounded monthly figures.
The actual impact on your mortgage would depend on the outstanding balance, remaining mortgage term and product conditions.
Could You Afford Your Mortgage If Rates Increased?
This is one of the first questions we’d ask someone considering a variable-rate mortgage.
Rather than looking only at today’s monthly repayment, consider what would happen if your mortgage rate increased by one or two percentage points.
Would the higher payment be manageable within your household budget?
Or would it place significant pressure on your finances?
There’s also a personal consideration.
Some borrowers are comfortable with interest rates changing and prefer the potential flexibility of a variable mortgage.
Others place greater value on knowing exactly what they’ll pay each month.
Your mortgage should be suitable for your finances and something you’re comfortable maintaining.
Should You Choose a Two-Year or Five-Year Fixed Mortgage?
If you’ve decided you’d prefer the certainty of a fixed-rate mortgage, the next question is often how long to fix for.
Two-year and five-year fixed mortgages are common choices, but neither is automatically better.
Two-Year Fixed Mortgages
A two-year fixed rate provides payment certainty for a shorter period.
You’ll generally have an opportunity to review your mortgage sooner, potentially benefiting if more competitive rates are available when your deal expires.
However, if interest rates have increased, you could face higher repayments when arranging your next mortgage.
Five-Year Fixed Mortgages
A five-year fixed rate provides payment certainty for longer.
This can appeal to borrowers who value predictable repayments and don’t want to revisit their mortgage arrangements after just two years.
However, it may also mean being tied into early repayment charges for a longer period.
Two-Year vs Five-Year Fixed Comparison
| Consideration | Two-year fixed | Five-year fixed |
|---|---|---|
| Payment certainty | Two years | Five years |
| Next mortgage review | Sooner | Later |
| Protection from rising rates | Shorter period | Longer period |
| Opportunity to access different rates | Earlier | Later |
| Potential early repayment charges | Usually over a shorter period | May apply over a longer period |
Your future plans are important.
For example, if you’re expecting to move home in three years, choosing a five-year fixed mortgage with substantial early repayment charges deserves careful consideration.
Alternatively, if you’re settled in your property and value certainty, a longer fixed period may be attractive.
We’d recommend choosing the mortgage that fits your plans rather than selecting a fixed period purely because you expect interest rates to move in a particular direction.
Should You Choose a Variable Mortgage If You Think Rates Will Fall?
It’s understandable to consider a tracker mortgage if you expect interest rates to decrease.
However, mortgage pricing is more complicated than simply predicting the Bank of England’s next decision.
Tracker mortgages linked to Bank Rate will generally respond to movements in that rate, subject to their terms.
Fixed-rate mortgages are influenced by wider financial market expectations, including swap rates and lender funding costs.
This means fixed mortgage rates can change before the Bank of England announces a rate increase or reduction.
For example, if financial markets have expected an interest rate cut for several months, some of that expectation may already be reflected in fixed mortgage pricing.
Equally, fixed mortgage rates can increase even when Bank Rate remains unchanged.
Trying to predict exactly when mortgage rates will reach their lowest point is extremely difficult.
Rather than choosing a mortgage based entirely on forecasts, we’d consider whether the product is affordable, appropriate and offers the certainty or flexibility you need.
Is the Lowest Mortgage Interest Rate Always the Best Deal?
Not necessarily.
A lower headline interest rate doesn’t automatically mean a lower overall mortgage cost.
For example, one mortgage might offer a slightly lower interest rate but charge a £1,999 product fee.
Another may offer a marginally higher rate with no arrangement fee.
Which is cheaper depends on your mortgage balance, the difference between the rates and how long you’re comparing the products for.
Other considerations include cashback, early repayment charges, valuation fees and overpayment flexibility.
We’d compare the overall cost and features of suitable mortgage products rather than automatically recommending whichever has the lowest advertised rate.
What Are Early Repayment Charges?
An early repayment charge, commonly known as an ERC, is a fee that may apply if you repay or switch your mortgage during a period when the lender imposes restrictions.
Many fixed-rate mortgages include ERCs.
For example, if you have an outstanding mortgage balance of £200,000 and a 3% early repayment charge applies, the potential charge would be £6,000.
That’s a significant cost if you need to leave the mortgage earlier than planned.
Early repayment charges may also apply to some variable-rate mortgages, so it’s important to check the product terms.
Can You Overpay a Fixed-Rate Mortgage?
Often, yes.
Many fixed-rate mortgages permit overpayments up to a specified allowance without triggering an early repayment charge.
However, the allowance and how it’s calculated vary between lenders and products.
Some variable mortgages may allow greater flexibility, particularly where no early repayment charges apply.
If you expect to receive a large bonus, inheritance or other lump sum that you may want to use towards your mortgage, this is worth considering before choosing a product.
The cheapest advertised interest rate may not be the most suitable option if the mortgage restricts what you’re planning to do.
What Happens When Your Fixed-Rate Mortgage Ends?
When your fixed-rate period finishes, you’ll normally move onto your lender’s Standard Variable Rate or another follow-on rate unless you’ve arranged a new deal.
That could result in a significant change to your monthly repayments.
However, you don’t need to wait until your fixed-rate mortgage has expired before reviewing your options.
At Lansdown Financial Services, we’d normally recommend starting the conversation around six months beforehand.
This gives us time to compare what your existing lender can offer with suitable products available elsewhere.
Depending on the lender, you may be able to secure a new mortgage rate in advance.
Is your current fixed-rate mortgage coming to an end?
Lansdown Financial Services can compare your remortgage and product-transfer options to help you understand which may offer the most suitable overall deal.
Call 01225 459515 for free mortgage advice.
Can You Move Home During a Fixed-Rate Mortgage?
Potentially, yes.
Many fixed-rate mortgages are portable, meaning you may be able to transfer your existing mortgage product to another property when moving home.
However, porting isn’t automatically guaranteed.
You’ll normally need to meet the lender’s affordability and eligibility requirements, and the new property must be acceptable.
If you’re borrowing additional money, that extra borrowing may need to be arranged on a separate mortgage product.
If you think you’re likely to move home during your fixed period, we’d recommend discussing that before choosing how long to fix your mortgage for.
Which Mortgage Might Be Right for You?
The most suitable mortgage depends on your personal circumstances and priorities.
| Your circumstances | What to consider |
|---|---|
| You want predictable monthly payments | A fixed-rate mortgage may provide greater budgeting certainty. |
| You’re comfortable with payments changing | A variable or tracker mortgage may be worth considering. |
| You expect to move home soon | Consider early repayment charges, portability and mortgage flexibility. |
| You want to make significant overpayments | Check the overpayment allowance and any applicable charges. |
| Your budget has limited flexibility | Consider carefully how higher variable-rate payments could affect affordability. |
| You’re approaching the end of a fixed deal | Compare product transfers and remortgage options in advance. |
We’d also look at your mortgage balance, property value, loan-to-value, income and future plans.
There isn’t one mortgage type that suits everybody.
Frequently Asked Questions About Fixed and Variable Mortgages
Is a Fixed-Rate Mortgage Better Than a Variable Mortgage?
Not necessarily.
A fixed mortgage provides greater payment certainty during the agreed period, while a variable mortgage may allow you to benefit from falling interest rates.
The right choice depends on your finances, future plans and attitude towards changing repayments.
Can Your Mortgage Payments Increase on a Fixed Rate?
Your normal contractual repayments generally remain unchanged during the fixed period, assuming the mortgage arrangements don’t change.
However, payments may change when the fixed deal expires or if you make changes to the mortgage.
Do Tracker Mortgages Always Follow the Bank of England Base Rate?
Many tracker mortgages are linked to Bank Rate, but some track other reference rates.
The mortgage terms specify which interest rate is tracked, the margin applied and when changes take effect.
Can You Switch from a Variable Mortgage to a Fixed Rate?
Potentially, yes.
You may be able to switch to a fixed-rate product through your existing lender or by remortgaging elsewhere.
However, eligibility, product availability and any early repayment charges will need to be considered.
How Lansdown Financial Services Can Help
Choosing between a fixed and variable-rate mortgage isn’t simply about predicting where interest rates might go next.
At Lansdown Financial Services, we’ll take the time to understand your financial circumstances, future plans and how comfortable you are with changing monthly repayments.
Whether you’re purchasing a property, remortgaging or approaching the end of a fixed-rate deal, our award-winning mortgage advisers can compare suitable fixed, tracker and other variable mortgage products.
We’ll consider the interest rates, fees, early repayment charges, overpayment allowances and overall borrowing costs to help identify a mortgage that’s appropriate for you.
As a free, whole-of-market mortgage adviser with access to more than 70 lenders, we provide straightforward, personalised advice without the jargon.
We can’t predict exactly where mortgage rates will be in two or five years.
But we can help you make an informed decision based on the options available today and what’s important to you.
Unsure whether a fixed or variable-rate mortgage would suit your circumstances?
Contact Lansdown Financial Services or call 01225 459515 to speak to one of our award-winning mortgage advisers for free, expert mortgage advice.
Your home may be repossessed if you do not keep up repayments on your mortgage.
About the Author
Written by Doug Miller, Director at Lansdown Financial Services.
Doug Miller is a mortgage broker and co-founder of Lansdown Financial Services, based in Bath, quoted in 30+ news articles including the Guardian, Sky News, This is Money and the Sun.
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