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

In the UK, when choosing a mortgage, one of the decisions you'll face is whether to opt for a fixed-rate or a variable rate mortgage. Understanding the key differences between these two types of mortgages can help you make an informed decision that suits your financial needs and risk tolerance. Here’s a breakdown of each:

Fixed Rate Mortgages - What is it?

A fixed-rate mortgage offers an interest rate that remains constant for a specified period. This period is commonly known as the 'fixed-rate term' and can range from 2 to 10 years, depending on the mortgage product.

Advantages:

- Predictability: Your monthly payments remain the same throughout the fixed term, making it easier to budget.

- Protection from rate increases: If interest rates rise, your rate will not change, so you won’t pay more until the fixed term ends.

Disadvantages:

- Higher rates: Fixed rates are often higher than the initial rates on variable mortgages because you pay a premium for stability.

- Less flexibility: Fixed-rate mortgages can come with higher early repayment charges, making it costly if you decide to switch or pay off your mortgage early during the fixed term.

Variable Rate Mortgages

What is it?

Variable rate mortgages can change at the lender's discretion or in line with fluctuations in the Bank of England base rate. There are several types of variable rate mortgages, including tracker, discount, and standard variable rate (SVR) mortgages. 

- Tracker mortgages: These directly follow the Bank of England base rate, plus a set margin. For example, if the base rate is 0.75% and the tracker rate is base rate plus 1%, your rate would be 1.75%.

- Discount mortgages: These offer a discount off the lender’s SVR for a certain period. For example, if the SVR is 4% and the discount is 1%, you pay 3%.

- Standard Variable Rate (SVR): This is the default rate lenders offer, usually higher than other types, and it can be changed at the lender's discretion.

Advantages:

- Potential lower costs: If interest rates fall, your payments could decrease. Tracker mortgages, in particular, directly follow the base rate, offering more transparency.

- Flexibility:They usually have lower or no early repayment charges compared to fixed-rate mortgages.

Disadvantages:

- Uncertainty: Monthly payments can increase if the interest rate rises, making budgeting harder.

- Higher costs in a rising rate environment: If rates go up significantly, so do your mortgage payments, which could strain your finances.

Choosing Between Fixed and Variable

The choice between a fixed and variable rate mortgage often depends on your financial situation, your ability to handle risk, and your expectations for interest rate movements. If you value stability and predictability in your budgeting, a fixed-rate might be more suitable. However, if you can handle some risk and want the potential to save on interest costs when rates are low, a variable rate could be appealing. It's essential to consider both your short-term affordability and long-term financial planning when making this decision.

Your home may be repossessed if you do not keep up repayments on your mortgage