What is a fixed-rate mortgage?
A fixed-rate mortgage means your mortgage interest rate is fixed for an agreed period.
Common fixed-rate periods include:
- 2 years
- 3 years
- 5 years
- 10 years
For example, if you take out a five-year fixed-rate mortgage at a particular interest rate, your mortgage rate will normally remain the same during that fixed period.
This can make your monthly mortgage payments more predictable, provided the amount borrowed and other mortgage terms remain unchanged.
Benefits of a fixed-rate mortgage
Predictable payments
One of the biggest advantages is knowing roughly how much your mortgage payment will be each month during the fixed period.
Protection from rate increases
If mortgage rates rise after you take out your fixed-rate deal, your fixed rate won’t normally change during the agreed fixed period.
Easier budgeting
Having predictable mortgage payments can make it easier to plan your household finances.
Potential disadvantages
You may not benefit if rates fall
If mortgage rates decrease, you generally won’t automatically benefit from lower rates while you’re still within your fixed period.
Early repayment charges may apply
Many fixed-rate mortgages have Early Repayment Charges if you repay the mortgage or make certain overpayments above the permitted amount during the fixed period.
Your payment may change when the fixed period ends
Once your fixed-rate period finishes, you’ll normally need to move onto another mortgage deal or your lender’s applicable variable rate if you don’t arrange a new deal.
What is a variable-rate mortgage?
A variable-rate mortgage is a mortgage where the interest rate can change.
There are different types of variable-rate mortgages, including:
- Tracker mortgages
- Discount mortgages
- Standard Variable Rate (SVR) mortgages
The way the rate changes depends on the type of mortgage and the lender’s terms.
What is a tracker mortgage?
A tracker mortgage typically follows an external interest rate, such as the Bank of England’s Bank Rate, plus or minus an agreed percentage.
For example, a mortgage might track the Bank Rate at a set margin.
If the relevant rate rises, your mortgage rate could rise. If it falls, your mortgage rate could fall, subject to the terms of the mortgage.
This means your monthly payments can change.
Benefits of a variable or tracker mortgage
You could benefit if rates fall
If the rate your mortgage tracks falls, your mortgage rate may also fall.
Potentially more flexibility
Some variable-rate products may have different early repayment terms from fixed-rate products, although this varies between mortgages.
You aren’t locked into one rate in the same way
Depending on the product, you may have more flexibility to change your mortgage strategy if circumstances change.
Potential disadvantages
Your payments can increase
If the relevant interest rate rises, your mortgage payments may increase.
Budgeting can be more difficult
Because your payments can change, you may need to be comfortable with a degree of uncertainty.
Future rates are unpredictable
Nobody can know with certainty where interest rates will be in the future.
Fixed vs Variable: What’s the difference?
The simplest way to think about it is:
| Fixed-rate mortgage | Variable-rate mortgage |
| Rate stays fixed for an agreed period | Rate can change |
| Easier to budget | Payments may fluctuate |
| Protection from rate rises during the fixed period | You may benefit if rates fall |
| May have Early Repayment Charges | ERCs and flexibility vary by product |
| Certainty over your rate | Greater exposure to interest-rate changes |
Neither option is automatically better.
The right choice depends on your individual circumstances.