Variable-rate or fixed-rate mortgage: which one should I choose? 

Over the last few years, homeowners have had a tough time with soaring mortgage rates, leaving millions struggling to decide between a fixed-rate and variable-rate deal. 

The Bank of England (BoE) has cut the base rate to 5% on 1 August, but it has taken longer than expected due to inflation falling slower than anticipated and strong UK wage growth.

Around 1.5 million people in the UK face higher monthly mortgage costs when their fixed-rate deals end this year. With the average two-year fixed rate mortgage at over 5%, they face significantly higher payments. 

If you get a two-year £200,000 fixed-rate repayment mortgage with a rate of 5.35%, your monthly repayments would be £1,116. If you were on a much lower rate of 2.5%, you would pay £790 each month, illustrating how quickly costs can jump when you fix on a higher rate. 

You could opt for a variable-rate deal, so your monthly payments may fall (or rise) with the base rate. 

We explore how fixed-rate and variable-rate mortgages work, the pros and cons of each, and the key things you need to consider.

Summary

• Deciding between a variable and fixed-rate mortgage can be difficult. 

• While a fixed-rate mortgage offers certainty and fixed payments, a variable-rate mortgage could mean lower monthly payments if the base rate falls. 

• Unbiased can match you with a qualified mortgage broker who can help you decide on the right mortgage for your unique circumstances. 

What is a fixed-rate mortgage? 

A fixed-rate mortgage means you pay the same amount each month during the term and are unaffected by external factors such as the base rate.  

So, for example, if the base rate is cut (or rises), your monthly payment remains the same. 

You can typically fix your mortgage between two and 10 years. When your deal ends, you’ll be moved onto the more expensive standard variable rate (SVR) unless you remortgage.  

What is a variable-rate mortgage? 

With a variable-rate mortgage, your interest rate can vary, so your monthly payments can rise and fall and may be influenced by changes in the BoE base rate. 

There are three types of variable-rate mortgages, which are: 

• Tracker-rate mortgage: This type of mortgage usually tracks the base rate plus a set percentage. For example, it could be the base rate plus 1%, so your current rate would be 6%. Some tracker mortgages may have a ‘floor,’ so your rate won’t decrease below this – even if the base rate falls below this. 

• Discounted-rate mortgage: With a discounted-rate mortgage, you get a discount from the SVR for a specific period. Your lender sets this, and it can vary, so you may not know the amount you pay every month. 

• SVR mortgage: Once your existing deal ends, you’ll be moved to the SVR, which can rise and fall. The average SVR is currently over 8%, so this is an expensive option, and you should consider remortgaging to a cheaper deal. One advantage of being on the SVR is you can usually remortgage without having to pay any early repayment charges (ERCs). 

What are the pros and cons of fixed-rate mortgages? 

There are many advantages and disadvantages to consider before getting a fixed-rate mortgage. 

The pros of a fixed-rate mortgage: 

• You’ll be confident that you’ll be paying the same amount every month. 

• Your mortgage won’t be immediately impacted if the base rate rises. 

• You can make overpayments, usually by 10%, to reduce the amount of interest you owe and pay off your mortgage early. 

The cons of fixed-rate mortgages: 

• Fixed-rate mortgages tend to be slightly more expensive than variable mortgages. 

• You’ll have to pay an ERC if you want to exit your deal or pay your mortgage off early. Switching to a cheaper deal may not be worthwhile, depending on the ERC. 

• If the base rate falls, this won’t impact how much you pay each month. 

• If you opt for a longer term, you may pay a higher rate. 

What are the pros and cons of variable-rate mortgages? 

Similar to fixed-rate mortgages, there are many advantages and disadvantages to consider.  

The pros of variable-rate mortgages: 

• Your monthly payments move with the base rate, so if it falls, you’ll pay less. This can be beneficial when the base rate is expected to fall regularly. 

• You can make overpayments to pay off your mortgage early and save money on interest. 

• Variable-rate mortgages are less likely to have ERCs for switching or paying your mortgage off early. 

• If you’re on the SVR, there are no limits on how much you can overpay without charge. 

The cons of variable-rate mortgages: 

• How much you pay for your mortgage every month could rise if the base rate does, which was a huge issue after the BoE hiked the base rate 14 times between December 2021 and August 2023.

• SVR mortgages are notoriously expensive compared to other types of mortgages. 

• While your mortgage payments will fall if linked to the base rate, there may be a limit to how low they can decrease.  

Should I choose a variable-rate or fixed-rate mortgage? 

Whether you opt for a variable-rate or fixed-rate mortgage depends on your circumstances and how comfortable you are with uncertainty and fluctuations in your mortgage payments. 

A variable-rate deal might be more suitable if you’re confident that the base rate will fall and are comfortable with volatility or want more flexibility. 

However, if you are seeking certainty with your monthly mortgage repayments and accept that you may be paying more if rates fall, a fixed-rate mortgage may be the more suitable option. 

You should think carefully about how long you fix for, as a base rate cut is expected this year. 

Need help deciding on a mortgage? 

A qualified mortgage broker can help you find the right deal for your circumstances and decide between a variable or fixed-rate mortgage. 

Unbiased can quickly match you with a mortgage broker who’ll help you with your property goals.