Fixed or variable rate mortgage – which is right for me?

There’s no one-size-fits-all answer whether someone should take a fixed or variable rate mortgage. In a higher mortgage rate environment, we understand it can be a challenging time for those coming to the end of their current mortgage term or entering the market for the first time. With market conditions frequently changing, it can be confusing to know whether a fixed or variable rate mortgage option is best for you.

In this article, we explain the benefits of both variable and fixed rate mortgages and why they may be suitable for your circumstances.

Our experienced consultants can help you understand your options while considering your individual circumstances, and help you make informed financial decisions. Speak with an expert consultant on 0800 980 8777 or alternatively email us at info@privatefinance.co.uk

Make a mortgage enquiry here


What is a fixed rate mortgage?

With a fixed-rate mortgage, the interest rate remains the same for a set period, typically between two and five years. Longer rates are available too but are less common. During the fixed rate period, your monthly repayments will be the same, regardless of any changes to the Bank of England base rate.

What is a variable rate mortgage?

The interest rate on a variable rate mortgage is not fixed but instead fluctuates in response to changes in economic or financial market conditions. This means that the interest rate on a variable rate mortgage can go up or down during the life of the loan, leading to potential adjustments in the borrower’s monthly mortgage payments. There are three main types of variable rate mortgages: tracker rate mortgages, discount rate mortgages, and standard variable rate mortgages.


What has happened to fixed rates recently?

The lending environment is frequently changing. In 2023, there was a notable economic shift as the Bank of England maintained the base rate at 5.25% since August following fourteen consecutive base rate hikes. The good news is that fixed mortgage rates continued to fall over the Autumn months of 2023 following falling inflation rate data and competitive pricing strategies from lenders. At the start of 2024, it is expected that further mortgage rate reductions are to come.


The benefits and disadvantages of fixed and variable rate mortgages

There are both benefits and disadvantages associated with fixed rate and variable rate mortgages.

These differ for the residential and buy-to-let markets.

Residential mortgages

Fixed rate mortgages

Benefits:

  • Certainty: The main benefit of a fixed rate mortgage is the predictability it offers. Borrowers can rely on the fact that their monthly mortgage payments will remain consistent throughout the entire term of the mortgage. This stability provides peace of mind and helps with budgeting, as there are no surprises due to interest rate fluctuations.
  • Lender Incentives: Some lenders may offer benefits for choosing a longer-term fixed rate mortgage, such as lower interest rates or the ability to borrow more.

Disadvantages:

  • Early repayment charge (ERC): One potential disadvantage of fixed rate mortgages is the possibility of an Early Repayment Charge (ERC). If you decide to pay off your mortgage or switch to a different product before the fixed term expires, you may incur an ERC, which can be a significant cost.

Variable rate mortgages

Considering a product that affords flexibility, such as a tracker or discounted variable rate, has also been popular for those at the end of their product term or on a lender’s Standard Variable Rate, particularly those with no early repayment charges.

Benefits:

  • Potential cost savings: Variable rate mortgages offer the possibility of reduced total mortgage payments if interest rates remain low over an extended period. This could result in interest rate savings compared to a fixed rate mortgage.
  • Flexibiliy: Variable rate mortgages offer more flexibility than fixed rate mortgages, especially those with no early repayment charges (ERCs). If there are no ERCs, it can be easier for the individual to switch deals if a better fixed or variable mortgage rate enters the market.

Disadvantages:

  • Risk: Variable rate mortgages are riskier because the interest rate fluctuates in response to broader economic and financial market conditions. If interest rates rise, borrowers may experience higher monthly payments, which can strain their budget.

Buy-to-let mortgages

The benefits and disadvantages between fixed and variable rates are similar to those of residential mortgages. Though in the buy-to-let mortgage market, the decision is influenced by factors that go beyond the simple expectation of interest rates, security and flexibility required.

Lenders in the buy-to-let market conduct stress tests for both fixed and variable rates to determine the maximum borrowing capacity. These stress rates can vary based on the product selected, with a 5-year fixed rate typically being more favorable. The potential rental income is considered when assessing borrowing capacity for buy-to-let mortgages. A lower stress rate used by the lender can allow investors to achieve higher borrowing for a given rental income, which can be beneficial for landlords.

The decision between a fixed or variable rate mortgage should be made after considering stress testing, rental income, and individual financial circumstances. If you are a landlord or would like to know more about how much you can borrow, our consultants can help you calculate the numbers while also considering your individual circumstances.


Should I choose a fixed or variable rate mortgage?

Choosing whether to fix your mortgage is a personal decision and varies depending on your individual circumstances, risk appetite, and ability to react to fluctuations in mortgage repayments. Many individuals prefer the stability and certainty of a fixed rate mortgage, whereas others are able to accept the risk of fluctuating mortgage repayments.

There is no crystal ball in determining the direction of fixed and variable rates over 2024. Many factors impact mortgage rate pricing, including but not limited to, inflation, SONIA swap rates, the Bank of England base rate, and economic uncertainty.

The best way to be absolutely sure that you have accounted for all of the factors when deciding between a fixed or variable rate mortgage is to speak to a qualified mortgage consultant. They will take the time to understand your unique circumstances and will use their up-to-the-minute, expert understanding of the mortgage market to provide you with an informed recommendation of the type of product that is best suited to you.

If you would like to discuss your mortgage options with a qualified professional, you can speak to one of our mortgage advisors on 0800 980 8777, by emailing us at info@privatefinance.co.uk

Make a mortgage enquiry here

Please remember that your home may be repossessed if you do not keep up repayments on your mortgage. 

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