Homeowners approaching the end of their current mortgage deals may be wondering whether to sign up for a fixed rate or a variable one in hopes that a better rate will become available soon.
The Bank of England’s base rate currently sits at 4.75%, following two rate cuts in August and November 2024. However, some commentators expect that we could see higher inflation for longer, which would mean rates are unlikely to fall again any time soon, although it’s impossible to know exactly where they will move next in an uncertain economic climate.
Teddy Cenaj, mortgage expert at Habito, said: “The majority of people choose a fixed rate mortgage for the security they offer, as it’s important to have control over the biggest outgoing in most people’s lives. The small percentage of people who choose a variable rate mortgage do so for a variety of reasons, such as they don’t want early repayment charges or are looking to sell soon.”
You’ll currently pay more if you opt for a tracker rate mortgage, which tracks the Bank of England base rate plus a set percentage, compared to a fixed rate mortgage, because interest rates are expected to fall over the long term.
For example, at the time of writing, NatWest has a two-year fixed rate mortgage deal at 3.99%, which is available on mortgages up to 60% loan to value. However, in comparison, Halifax’s best buy two-year tracker deal, which is 0.08% over base rate, and means you’d currently be paying 4.83%, is almost one percentage point more expensive. This deal is again available on mortgages up to 60% loan to value.
Because the rate difference is significant, most borrowers may find they are better off with a fixed rate for now – although the reverse could end up being true if the base rate does reduce.
Here, we outline the advantages and disadvantages of fixed and variable mortgages to help you work out which might be the right option for you.
Is now the right time to get a new mortgage deal?
If you’ve been thinking about buying a property or remortgaging you might be dismayed about how much higher mortgage rates are now compared to when you last remortgaged.
According to Moneyfacts.co.uk, average rates on two and five-year fixed mortgages stood at 5.39% and 5.09% respectively in November 2024, although as mentioned earlier, best buy two and five year fixes, which are usually reserved for those with a substantial deposit or significant amount of equity to put down, are currently just under 4%.
Tracker rates, which are variable and track the Bank of England base rate plus a set percentage, are currently slightly higher, with the cheapest two-year deals currently starting at 4.83%, or the current base rate plus 0.08%.
What's the difference between a fixed and variable rate mortgage?
When you take out a mortgage, you have a variety of options, including whether you’d like to be charged a fixed or variable rate of interest on your loan. This essentially means that you either opt for a mortgage that will charge you a set interest rate on the money you are borrowing for a defined period of time (fixed rate) or one where your rate of interest may go up or down during your mortgage term (variable).
Fixed rate mortgages
When you choose a fixed rate mortgage, you’ll be charged a set interest rate for a specific period of time, with most lenders offering two, three or five year fixed terms. When your mortgage deal ends, unless you remortgage to a new deal, you’ll usually automatically roll onto your lender’s SVR, which can be at a considerably higher rate than the fixed term rate you were paying.
Advantages of a fixed rate mortgage
The biggest and most obvious benefit of choosing a fixed rate deal is that it provides you with set monthly repayments so that you know exactly how much you’ll be paying each month for the duration of the deal, regardless of what happens to the Bank of England base rate during this period. The Bank of England has raised the base rate several times recently, which could make a fixed rate mortgage more attractive to you at present for some financial security when other household bills are rising.
Disadvantages of a fixed rate mortgage
While you protect yourself from potential interest rate rises when you fix your mortgage rate, on the other end of the spectrum, if interest rates fall, you won’t benefit from a reduction in repayments. Additionally, if you fix your mortgage rate, and then see a much better deal that you want to switch to, the early repayment charges you might face to move on to another deal could be considerable, meaning that switching may not be financially worthwhile.
Another possible downside is that often the longer the fix, the higher the interest rate is likely to be, although the difference in rates between short-term and longer-term fixed rate deals has reduced in recent months, and in some cases it costs less to lock in for the long term. This could be a sign that financial markets are anticipating a recession and expect interest rates to fall in the future, making it more likely that you will be paying over the odds if you fix your mortgage for a longer term. You can read more about this in our article Should I lock into a long-term fixed rate mortgage?
Variable rate mortgages
While a fixed rate mortgage is pretty straight forward, variable rate mortgages can be a little more complicated as different lenders will base the rate on different measures. The three core types of variable rate mortgages are:
- Tracker rates – these mortgages track the Bank of England’s base rate plus a set percentage
- Standard variable rate (SVR) – this is the rate that people usually transfer to once their fixed term rate deal ends. Each lender works out their SVR differently, but the current average SVR is 7.95%
- Discount rate – this is a rate that is set at a specific percentage below a lender’s SVR.
Depending on your personal preferences, this could either sound really appealing or a bit scary, so let’s look at the advantages and disadvantages of variable rate mortgages
Advantages of variable rate mortgages
The main benefit of variable rate mortgages is that if interest rates fall, you could end up paying considerably less for your mortgage than you would if you’d opted for a fixed rate deal.
Variable rate mortgages are also less likely to have early repayment charges, so if you decide to switch mortgage deals or pay your mortgage off entirely, you won’t be charged for doing so.
Disadvantages of variable rate mortgages
The obvious potential disadvantage of a variable rate mortgage is that your interest rate is not set and could move up or down throughout the life of your mortgage. If interest rates rise substantially you could therefore end up facing much higher mortgage repayments.
It’s also worth noting that a number of lenders have so-called ‘collars’ on their variable rates which mean your interest rates can’t fall below a certain percentage, even if interest rates fell to 0%, but your collar was 1%, you would still be paying 1%.
Where to seek advice
Ultimately, everyone’s circumstances are different and it’s important to choose the right mortgage deal for you.
If you are unsure what the best option is, it can be good to speak to a mortgage broker or advisor to make sure you find the best deal for you based on your individual circumstances. Find out more in our article Should I get advice on my mortgage?
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
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