Fixed vs Variable Rate Mortgage: Which Is Better?
Should you choose a fixed or variable rate mortgage? Compare the risks, costs, and when each makes sense, with worked payment examples.
Choosing between a fixed and variable rate mortgage is one of the most consequential financial decisions homeowners make. The right choice depends on your risk tolerance, how long you plan to stay, and your view on where interest rates are heading.
Fixed Rate vs Variable Rate: The Definitions
A fixed rate mortgage locks your interest rate (and therefore your monthly payment) for a set period, typically 2, 3, or 5 years in the UK. After the fixed period ends, you move to the lender's standard variable rate unless you remortgage.
Formula
Monthly Payment = P[r(1+r)^n] / [(1+r)^n-1]. Where P = loan amount, r = monthly rate, n = number of payments
Example
£250,000 mortgage at 4.5% fixed for 5 years, 25-year term. Monthly payment ≈ £1,389. Total paid in 5 years = £83,340 (principal + interest).
A variable rate mortgage has an interest rate that can change. Types include: Standard Variable Rate (SVR, set by the lender), Tracker (follows Bank of England base rate + a margin), and Discounted (lender's SVR minus a set discount).
Formula
Monthly Payment recalculates whenever the rate changes. Tracker rate = Base Rate + Margin.
Example
£250,000 tracker at Bank of England base rate + 0.75% (current: 5.25% = 4.5% effective), 25-year term. Same payment as above, but if base rate rises to 5.75%, payment rises to ≈ £1,454.
Key Differences
- 1Fixed rates provide payment certainty; variable rates fluctuate with market conditions
- 2Fixed rates usually carry early repayment charges (ERCs) during the fixed period; many variable deals do not
- 3Variable rate deals (especially trackers) often have lower initial rates than fixed rates
- 4Fixed rates protect you if rates rise; variable rates benefit you if rates fall
When to Use Fixed Rate vs Variable Rate
If you cannot absorb a payment increase, fix. If you value flexibility, plan to overpay significantly, or believe rates will fall, a variable or tracker may save money. Most financial advisers suggest fixing when rates are low relative to historical norms.
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Common Mistakes to Avoid
Picking the lowest initial rate without checking the ERC and revert rate, a cheap 2-year fix that reverts to a 7% SVR can cost more overall
Over-fixing for too long when you plan to move within 3 years, ERCs can be 1–3% of the outstanding loan
Ignoring the arrangement fee, a £999 fee on a £200 saving per month takes 5 months to recoup; shorter deal terms may not be worth it
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Frequently Asked Questions
Are fixed rate mortgages more expensive?↓
They often carry a premium over variable rates for the certainty they provide. However, if rates rise during your fixed period, a fixed rate saves money. The true cost comparison depends on what happens to rates during your term.
What happens when a fixed rate ends?↓
You move onto your lender's Standard Variable Rate (SVR), which is typically much higher than your fixed rate. You should remortgage before the fixed period ends to secure a new deal and avoid the SVR.
What is a tracker mortgage?↓
A tracker mortgage tracks an external rate, usually the Bank of England base rate, plus a set margin. If the base rate is 5% and your margin is +0.75%, you pay 5.75%. Your rate moves automatically when the base rate changes.
Can I switch from variable to fixed?↓
Yes, usually without penalty on a variable rate deal. You can remortgage to a fixed deal at any time, though you may need to pay arrangement fees for the new deal.
How much does a 1% rate increase affect my mortgage payments?↓
On a £250,000 mortgage with 20 years remaining, a 1% rate increase adds roughly £125–£140 per month to your payment. Use our mortgage calculator to model the exact impact for your situation.