Fixed or variable rate mortgages: Which one is right for you?

When buying a home, one of the most important decisions you’ll need to make is choosing the right mortgage type. A mortgage is a long-term financial commitment, so selecting the right structure can significantly impact your financial stability and monthly budgeting. 

Here’s a guide to help you understand the differences, benefits, and potential drawbacks that will help you make an informed decision.

Fixed-rate mortgages

A fixed-rate mortgage is a home loan where the interest rate remains the same for a set period, typically between two and five years, though some lenders offer terms up to ten or even fifteen years. The key benefit is that your monthly repayments remain consistent, regardless of any changes in interest rates.

Benefits of a fixed-rate mortgage

1. Predictable monthly payments – With a fixed interest rate, your repayments won’t change throughout the fixed term, making it easier to budget. 
2. Protection from interest rate increases – If interest rates rise during your fixed term, your mortgage rate stays the same, potentially saving you money. 
3. Peace of mind – Knowing exactly how much you’ll pay each month provides financial security and makes planning easier.

Things to consider

1. Potentially higher initial rates – Fixed-rate mortgages often start at a slightly higher rate than some variable deals. 
2. Limited flexibility – Overpaying or switching deals before your fixed period ends may come with early repayment charges (ERCs). 
3. No benefit if interest rates fall – If interest rates decrease, you won’t see any savings until your fixed term ends and you remortgage.

A fixed-rate mortgage is ideal if you prefer certainty in your repayments and want to avoid the risk of increasing rates during your fixed term.

Use our mortgage calculator to get an idea of how much you can borrow. 

Variable-rate mortgages

A variable-rate mortgage has an interest rate that can fluctuate over time. These mortgages are directly or indirectly linked to the Bank of England’s base rate or the lender’s standard variable rate (SVR). As a result, your monthly repayments may go up or down.

There are two main types of variable rate mortgages: tracker mortgages and standard variable rate mortgages.

Tracker mortgages

A tracker mortgage has an interest rate that is directly linked to the Bank of England’s base rate, plus a percentage set by the lender. This means that as the base rate changes, your mortgage interest rate will move by the same amount, either increasing or decreasing accordingly.

For example, if your tracker mortgage is set at 1% above the Bank of England base rate, and the base rate increases by 0.5%, your mortgage rate will also rise by 0.5%. If the base rate was initially 2.5%, it would increase to 3% after the rate change. Conversely, if the base rate drops by 0.5%, your mortgage interest rate will also decrease by the same amount, reducing from 2.5% to 2%.

Tracker mortgages typically have a fixed tracking period, usually two years, but some lenders offer tracker deals that last for the entire mortgage term. Once the tracker period ends, you will automatically move onto the lender’s standard variable rate (SVR), unless you remortgage to a new deal.

This type of mortgage can be beneficial if interest rates remain low or decrease over time, but it also carries the risk of rising repayments if the base rate increases.

Access the latest mortgage rates

Standard variable rate (SVR) mortgages

A standard variable rate (SVR) mortgage is set by the lender and is usually the default rate you move onto when your fixed or tracker deal ends. Unlike tracker mortgages, an SVR is not directly tied to the Bank of England base rate, meaning lenders can change it at their discretion.

While many lenders adjust their SVR in response to base rate changes, they are not required to do so, and the extent of the change varies. In some cases, lenders may increase, decrease, or leave their SVR unchanged, regardless of movements in the base rate.

Key points about SVRs

• Flexibility – SVRs allow unlimited overpayments and early repayment without penalties. 
• Higher interest rates – These rates tend to be higher than fixed or tracker mortgages, making them an expensive long-term option. 
• Uncertainty – Lenders can change SVR rates at any time, making repayments less predictable. 
• Better alternatives available – Most borrowers remortgage or switch before moving onto an SVR to secure a lower rate.

Lenders will notify borrowers before their mortgage deal ends, outlining their SVR rate and alternative options. If no action is taken, repayments will be adjusted accordingly once the SVR applies.

Related: Early repayment charges explained

Things to consider

1. Unpredictable repayments – Your monthly payments can increase if interest rates rise, making budgeting more difficult. 
2. Lender control – With an SVR mortgage, the lender can change the rate at any time, even if the Bank of England base rate remains the same. 
3. Risk factor – If rates increase significantly, your mortgage could become more expensive over time.

A variable-rate mortgage could be suitable if you are comfortable with some risk and have flexibility in your finances to accommodate potential increases in repayments.

Which mortgage is right for you?

Choosing between a fixed-rate and variable-rate mortgage depends on your financial situation, risk tolerance, and long-term plans. Here are some key factors to consider:

• Do you prefer stability or flexibility? If you want consistent payments and protection from rate hikes, a fixed-rate mortgage is a safer choice. If you are comfortable with fluctuations and potential savings when rates drop, a variable-rate mortgage might work better. 
• What are the current market conditions? If interest rates are historically low, fixing your rate now could provide security. If rates seem high and might drop, a variable deal could be worth considering. 
• How long do you plan to stay in the property? If you expect to move within a few years, a variable-rate mortgage might offer more flexibility without early repayment charges. If you’re planning to stay long-term, a fixed-rate deal can provide stability.

There’s no one-size-fits-all approach when it comes to choosing a mortgage. The right option depends on your financial goals, plans, and attitude toward risk. Before deciding, it’s always worth speaking to a mortgage advisor who can assess your circumstances and help you find the best deal.

Whether you choose fixed or variable, selecting the right mortgage will help ensure a smooth and manageable homeownership journey. Contact your local Martin & Co branch today.