One of the biggest decisions you will make when choosing a mortgage is whether to go for a fixed or variable rate. Both have distinct advantages and drawbacks, and the right choice depends on your financial situation, your appetite for risk, and what is happening in the wider economy. This guide explains the key differences to help you make an informed decision.
What Is a Fixed Rate Mortgage?
With a fixed rate mortgage, your interest rate stays the same for a set period, regardless of what happens to the Bank of England base rate or the wider market. Fixed rate periods typically last 2, 3, or 5 years, though some lenders offer 7 or even 10-year fixes.
During the fixed period, your monthly payment does not change. This makes budgeting straightforward, as you know exactly what you will pay each month.
Advantages of Fixed Rate Mortgages
- Payment certainty: Your monthly payment stays the same for the entire fixed period, no matter what happens to interest rates
- Protection from rate rises: If the base rate increases, your mortgage payment is unaffected
- Easier budgeting: You can plan your finances with confidence, knowing your biggest monthly outgoing will not change
- Peace of mind: No worrying about rate movements or market volatility
Disadvantages of Fixed Rate Mortgages
- No benefit from rate drops: If interest rates fall, your payment stays the same. You will not benefit unless you remortgage (which may incur early repayment charges)
- Early repayment charges (ERCs): If you want to leave your fixed deal early, whether to remortgage or move house, you will typically face charges of 1-5% of the outstanding balance
- Potentially higher initial rates: Fixed rates can be slightly higher than equivalent variable rates, as you are paying a premium for the certainty
- Less flexibility: Making overpayments may be limited (usually capped at 10% of the balance per year)
Choosing a Fixed Rate Term
The length of your fixed period is an important decision:
2-Year Fix
The most popular choice for many borrowers. A 2-year fix gives you short-term certainty and the flexibility to reassess relatively quickly. It suits people who may want to move, remortgage, or who expect rates to fall in the near future.
5-Year Fix
Increasingly popular, particularly among first-time buyers and families who value longer-term stability. A 5-year fix locks in your rate for longer, giving you greater protection against rate rises. The trade-off is slightly less flexibility and potentially higher ERCs if you need to exit early.
Longer Fixes (7-10 Years)
These offer maximum stability but are less common. They can suit buyers who plan to stay in their property for the long term and want the ultimate payment certainty. However, ERCs apply for the full term, which can be costly if circumstances change.
What Is a Variable Rate Mortgage?
With a variable rate mortgage, your interest rate can go up or down during the mortgage term. There are several types of variable rate mortgage, each working slightly differently.
Tracker Mortgages
A tracker mortgage follows the Bank of England base rate plus a set margin. For example, a tracker at "base rate + 1%" would give you an interest rate of 5.5% if the base rate is 4.5%.
When the base rate moves, your mortgage rate moves by the same amount. This makes tracker mortgages transparent and predictable in terms of how rate changes affect you, even though the rate itself is variable.
Best for: Borrowers who believe interest rates will fall or remain stable, and who are comfortable with some payment uncertainty.
Discount Rate Mortgages
A discount mortgage offers a set percentage off the lender's Standard Variable Rate (SVR) for a specified period. For example, if the SVR is 7.5% and you have a 2% discount, your rate would be 5.5%.
The key difference from a tracker is that the lender can change their SVR at any time, not just when the base rate changes. This means your rate could move even if the base rate stays the same.
Best for: Borrowers looking for a lower initial rate who understand the SVR may change at the lender's discretion.
Standard Variable Rate (SVR)
The SVR is the lender's default rate, the rate you move to when your fixed or introductory deal ends. SVRs are typically the most expensive mortgage rates available, often significantly higher than fixed or introductory variable rates.
Very few people actively choose to be on SVR. It is usually something you fall onto when a deal expires. If you are currently on SVR, it is almost certainly worth exploring whether you could save by switching to a new deal.
Advantages of Variable Rate Mortgages
- Potential savings if rates fall: Unlike a fixed rate, you benefit directly when interest rates drop
- Lower initial rates: Some variable deals, particularly trackers, can start at lower rates than equivalent fixed deals
- More flexibility: Many variable rate mortgages have lower or no early repayment charges, giving you more freedom to overpay, remortgage, or move
- Transparency (trackers): With a tracker, the relationship between the base rate and your mortgage rate is clear and predictable
Disadvantages of Variable Rate Mortgages
- Payment uncertainty: Your monthly payment can increase, sometimes significantly, if rates rise
- Budgeting difficulty: Harder to plan your finances when payments may change
- Risk of rate rises: If the base rate increases, your payments go up accordingly
- Stress: Constant media coverage of interest rate decisions can cause anxiety for variable rate borrowers
How to Decide: Fixed vs Variable
There is no universally right answer. The best choice depends on your personal circumstances. Here are some questions to help you decide:
Choose Fixed If:
- You are a first-time buyer and want certainty while you adjust to homeownership costs
- You have a tight budget and could not comfortably absorb higher payments if rates rose
- You plan to stay in your property for the duration of the fixed term
- You prefer knowing exactly what you will pay each month
- You believe interest rates may rise in the coming years
Choose Variable If:
- You have financial flexibility and could absorb higher payments if rates increased
- You believe interest rates are likely to fall or remain stable
- You want the option to overpay or remortgage without early repayment charges
- You may need to move or make changes within the next couple of years
- You are comfortable with some uncertainty in exchange for potential savings
What Happens When Your Deal Ends?
Whether you choose fixed or variable, most mortgage deals have a set term (typically 2-5 years). When that term ends, you will usually move onto the lender's SVR, which is almost always more expensive.
This is why it is important to review your mortgage before your deal expires. We recommend starting to look at your options three to six months before your current deal ends. This gives you time to compare deals and complete a new application, so you can move seamlessly from one deal to the next without spending any time on SVR.
Can You Switch Between Fixed and Variable?
Yes, but not usually during a deal. When your current fixed or variable deal ends, you can choose a completely different type for your next deal. Many people switch between fixed and variable rates depending on the market conditions and their personal circumstances at the time.
A mortgage broker can help you assess the options available and advise on whether fixed or variable makes more sense given current market conditions and your individual situation.
Need Help Choosing?
At CGR Financial, we help clients across Northern Ireland navigate these decisions every day. We will take the time to understand your financial situation, explain the pros and cons of each option, and search the whole market to find the best deal for you.
Get in touch for a free, no-obligation consultation. Whether you are a first-time buyer, remortgaging, or investing in property, we are here to help.