Fixed or variable interest rate in the UK – pros and cons

Are you applying for a mortgage for your dream home in the UK? Not sure what interest rate will be appropriate? Check whether it is better to choose a fixed or variable interest rate in the UK! In the following entry we suggest which interest rate to choose. You will learn the pros and cons of any mortgage interest rate in the UK.

Mortgage interest rate in the UK – types of interest rate

When deciding to take out a mortgage with a UK lender, you have several options to choose from. You can opt for a fixed-rate or variable-rate mortgage (such as a tracker). While both types of mortgages have their advantages, the choice of a specific product should be carefully considered – after all, you will be dealing with its consequences for at least several years.

The choice of interest rate type does not only affect the amount of interest you pay – it is much more than that. In addition to the interest rate, early repayment charges, commissions, and many other factors may also vary.

Fixed-Rate Mortgage

With a fixed-rate mortgage, your monthly payment stays the same for the fixed period, usually between 2 and 5 years. This is a safer choice for those seeking predictability and security.

When the fixed-rate period ends, you will automatically move onto your lender’s reversion rate, often its standard variable rate (SVR), unless you arrange a new deal. At this point you can look for a new deal with your current lender or remortgage to another lender, which will usually carry out its own affordability checks.

Whether a fixed or a variable deal works out cheaper depends on how interest rates move during the deal period.

Variable-rate mortgages (tracker and SVR)

Tracker mortgages are linked to an external interest rate, such as the Bank of England base rate. A standard variable rate (SVR) is the lender’s own variable rate and is often the reversion rate you move onto when an initial deal ends.

Will I be able to borrow more if I choose a fixed interest rate?

The type of interest rate can affect how a lender assesses affordability. Under FCA rules, lenders must allow for possible interest rate rises over at least the first five years when assessing affordability, unless the rate is fixed for five years or more. The lender still decides how much it will lend based on its own assessment, carried out by its underwriters.

What mortgage rate in the UK to choose?

You are probably wondering what to choose. With a fixed interest rate, you will not benefit from a fall in interest rates until the fixed-rate period ends. On the other hand, a tracker mortgage will become more expensive if the Bank of England raises its base rate. The choice of interest rate should therefore be made based on the current situation in the UK, forecasts for the coming years, and the interest rate itself.

In most cases, we recommend fixed-rate mortgages to our clients, although this is not a rule that we always follow. It is not difficult to find a mortgage that will statistically prove to be a good choice - the point is to find the best product when taking into account the client’s individual situation and all their needs. If you have doubts about choosing the right interest rate, seek help from Extend Finance. We are independent mortgage brokers and have already helped hundreds of clients choose the right mortgage and interest rate.

Interest rate with a fixed or variable rate – pros and cons

Both fixed and variable interest rates have their advantages and disadvantages. Here is a practical summary:

Fixed interest rate

Pros:

• security – your monthly payment stays the same for the fixed period;

• easier household budget planning.

Cons:

• a fixed interest rate may be higher than the rate on other mortgage types, so you could end up paying more;

• if the Bank of England lowers interest rates, you will not be able to reduce your monthly payment and thus save money;

• if you want to repay your mortgage before the fixed-rate period ends, your lender is likely to charge an early repayment charge (ERC).

Variable interest rate

Pros

• If the Bank of England lowers its base rate, the rate on a tracker mortgage falls with it.

Cons

• If the Bank of England raises its base rate, the rate on a tracker mortgage rises with it, so monthly payments increase.

• A variable-rate mortgage carries the risk of increased monthly mortgage costs, so it is a good idea to have savings when choosing this option.

Summary

• You can choose between a mortgage with a variable and a fixed interest rate;

• With a fixed interest rate, your monthly payment stays the same for the fixed period;

• A variable rate can change during the deal: a tracker moves with the Bank of England base rate, while an SVR is set by your lender;

• When taking a mortgage in the UK, it is worth analysing several factors in advance, such as interest rates, the economic situation in the UK or forecasts for the coming years.

I encourage you to contact Extend Finance if you need a mortgage advisor who will check the available options that are on the market and advise which one to choose.