When you’re choosing a mortgage product, one of the main decisions you need to make is whether to go for a variable or a fixed interest rate charged on your mortgage loan.
With a variable-rate mortgage, the amount of interest applied to your loan and therefore your monthly payments can change over time. There are three main types of interest rate:
- Standard variable rate (SVR). This is a rate set by the lender, which could change as often as monthly - although lenders generally revise their rates quarterly and the SVR won’t necessarily change just because the Bank of England has increased or reduced the base rate slightly.
The SVR is usually the most expensive option in terms of the interest rate, however the benefit is that you’re not tied in to the deal and can therefore change your mortgage without a financial penalty.
Other types of product can come with an introductory tie-in – commonly two years - meaning there could be a cost if you want to redeem it before the end of that initial period. At the end of the tie-in, you can either remortgage or the lender will automatically move you onto their SVR.
- This is set at a specific percentage above the Bank of England base rate and rises and falls in line with it.
- Discounted. These deals work in a similar way to a tracker but are set at a specific margin below the lender’s SVR, and the rate you pay moves up and down in line with that.
With a fixed-rate mortgage, you are locked into an interest rate for a set period, commonly between two and five years, although many lenders offer products for up to 10 years. If an early redemption charge is applied, this usually reduces over time, so the nearer you are to the end of your tie-in, the less it costs you to exit early.
Pros and cons
The big benefit of having a fixed rate is the certainty of knowing that your monthly payments won’t change and you’ll be protected against rate rises over that period of time. The potential downside is that if interest rates fall dramatically, you could end up paying more than you would on a different product, and it may be too expensive to redeem your mortgage early.
Being on a variable rate can be very beneficial if interest rates are on a downward trend, as your monthly payments could keep reducing. The obvious risk is that if something happens in the economy that leads to the base rate rising, your mortgage costs will almost certainly rise. And a lender could change their SVR at any point, regardless of external factors.
What’s more common at the moment, fixed or variable?
The proportion of people on fixed-rate mortgages has increased dramatically over recent years. In Q1 of 2016, only 51% of outstanding UK mortgages were fixed rate, but the most recent data from the ONS shows that by Q4 of 2023, that figure had risen to 88%, with two-thirds of those being five-year products.
A big factor in this increase was the cost-of-living crisis and rocketing interest rates that followed the COVID-19 pandemic and Liz Truss’s mini budget in September 2022. Housing costs increased significantly for a lot of people, especially those with higher mortgage borrowing on variable interest rates, so many chose to secure a fixed rate to insulate themselves against further rises in the short to medium term.
We saw this trend continue in 2024 and anticipate two-year fixed-rate deals being particularly attractive in 2025, as borrowers look to protect mortgage costs through the current political and economic uncertainty. See our recent article outlining our mortgage predictions for the year.
Take tailored advice to work out what’s right for you
As with any kind of financial decision, what’s right for one person - or even for most people - may not be right for you, so you’ve got to make sure you take qualified and regulated advice that’s tailored to your own personal circumstances.
Our experts at Mortgage Scout can talk through your options and help you find the product that’s going to be right for you this year and beyond. Get in touch with us via online chat, by completing our enquiry form or by calling 0800 144 4744.
