When you’re a first-time home buyer, lenders will offer you two different types of mortgage–a fixed rate mortgage or a variable rate mortgage. It’s important to understand the difference between the two before making a decision. Here’s everything you need to know about fixed rate and variable rate mortgages.
Fixed Rate Mortgage
A fixed rate mortgage is just as it sounds–the interest rate on your mortgage is fixed for the entirety of the loan. This means that your monthly payments will always be the same, no matter what happens with interest rates in the market. The main benefit of a fixed rate mortgage is that it provides stability and peace of mind for borrowers. You’ll never have to worry about your interest rates going up and eating into your budget.
Variable Rate Mortgage
A variable rate mortgage, on the other hand, has an interest rate that can fluctuate over time. Usually, the interest rate is tied to changes in the prime lending rate set by banks–so when the prime lending rate goes up, so does your interest rate (and vice versa). The advantage of a variable rate mortgage is that it usually starts off with a lower interest rate than a fixed rate mortgage. This can save you money in the short-term. However, because the interest rate is not fixed, there’s always a risk that it could go up in the future and leave you with larger monthly payments than you were expecting. It’s worth understanding what happens when your fixed rate period ends before committing to either option.
Frequently Asked Questions
Which is better, a fixed rate or variable rate mortgage?
Neither option is universally better as the right choice depends on your individual circumstances and risk tolerance. A fixed rate mortgage provides certainty over your monthly payments for a set period, which is ideal if you are on a tight budget or prefer financial predictability. A variable rate mortgage may offer lower initial rates but carries the risk that payments could increase if the Bank of England base rate rises.
Can you switch from a fixed rate to a variable rate mortgage?
Yes, it is possible to switch from a fixed rate to a variable rate mortgage, but doing so during your fixed term will usually incur an early repayment charge (ERC). These charges can be significant, often ranging from one to five percent of the outstanding loan balance. Most borrowers wait until their fixed term expires before switching to avoid these penalties. At that point you can remortgage to a new deal without any charges.
What happens when my fixed rate mortgage period ends?
When your fixed rate period expires, your mortgage will automatically move onto your lender’s Standard Variable Rate (SVR), which is typically much higher than the rate you were paying. This can result in a significant increase in your monthly repayments. It is advisable to start looking for a new mortgage deal around six months before your fixed rate ends so you can secure a competitive rate and avoid paying the SVR.
Are tracker rate mortgages risky?
Tracker mortgages follow the Bank of England base rate plus a set margin, so your payments will rise and fall directly in line with base rate changes. This makes them riskier than fixed rate products because your monthly costs are unpredictable. However, tracker rates are often lower than fixed rates when the base rate is stable or falling. Some tracker mortgages include a collar or cap that limits how low or high your rate can go, offering some protection against extreme movements.
What is a Standard Variable Rate (SVR)?
A Standard Variable Rate is the default interest rate that your mortgage lender charges once any introductory deal period, such as a fixed or tracker rate, has ended. The SVR is set by each lender individually and is usually significantly higher than the rates available on new mortgage deals. Lenders can change their SVR at any time, regardless of changes to the Bank of England base rate, which is why most borrowers remortgage before their deal expires to avoid paying it.
When deciding between a fixed or variable interest rate mortgage, it’s important to think about your financial goals and needs. If you’re looking for stability and predictable monthly payments, a fixed interest rate mortgage is probably your best bet. On the other hand, if you’re willing to take on some risk in exchange for potentially lower monthly payments upfront, a variable interest rate mortgage could be right for you. If your current deal is coming to an end, our remortgaging service can help you find the best new rate.