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.

What interest rate to choose? Fixed or variable?

Mortgage interest rate in the UK – types of interest rate

When deciding to take out a mortgage with any bank in England, Wales, or Scotland, you have several options to choose from. You can opt for a fixed-rate or variable-rate (tracker) mortgage. 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

A fixed-rate mortgage is currently the default solution in the UK—around 90% of our customers choose this product group. Your mortgage agreement will guarantee that** your mortgage payment will remain fixed for a specified period, usually between 2 and 5 years.** This is a safer choice for those seeking predictability and security, even if it means paying slightly higher installments for a short period of time.

Usually, when the mortgage agreement expires, the interest rate changes to a significantly higher one - the fixed interest rate is then converted to a variable rate. However, there is nothing to prevent you from changing your lender at this point and enjoying the benefits of a fixed interest rate again.

Fixed-rate mortgages are often, but not necessarily, cheaper than variable-rate mortgages. As a result, they are generally a better choice, as long as interest rate cuts by the Bank of England are not very likely.

Standard Variable Rate

It is worth remembering that tracker mortgages are completely different from variable rate mortgages. The former are products that essentially compete with fixed-rate mortgages – the interest rate is variable from the first day of the mortgage agreement, but for a specified period of time, it has a preferential value.

Variable rate interest is usually referred to as the terms of the mortgage agreement that are introduced after the preferential period expires. As a rule, variable rates are never profitable for the borrower. At the time of writing, they can be up to 2% higher than tracker and fixed mortgages.

The interest rates on tracker and variable rate mortgages are derived from the Bank of England interest rates and the SONIA (Sterling Overnight Index Average) index. Explaining the impact of all macroeconomic factors on mortgage interest rates is pointless, so let us just note that although** variable rate mortgages may react with a slight delay, their interest rates always follow the base rate. **This will naturally be an advantage when inflation is under control, but in 2022-2023, borrowers repaying this type of mortgage will certainly face enormous problems.

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

The impact of the type of interest rate onaffordability is not clear-cut, although certain general market trends can be observed here as well. Although your creditworthiness should be based solely on your income and the average long-term interest rate on mortgages, the reality is somewhat different.

In our experience, underwriters are more favorable in assessing the creditworthiness of people who apply for fixed-rate mortgages. This is obviously due to the significantly lower risk of an increase in installments in the near future, which allows for a milder stress test, or even no stress test at all. However, it is worth assuming that even if the lender did not conduct a stress test at all, it would be easier for you to obtain a high mortgage with a fixed rate than with a variable rate. For the bank, this also means less risk of problems.

What mortgage rate in the UK to choose?

You are probably wondering what to choose. A fixed interest rate, although more popular, deprives you of the opportunity to benefit from a fall in interest rates, which is relatively likely. On the other hand, a tracker mortgage will prove to be much more expensive if something unexpected happens that forces the BoE to raise interest rates. 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

As we have already mentioned, both fixed and variable interest rates have their advantages and disadvantages. Although we have already mentioned most of them in this article, it is worth summarizing all this knowledge once again in the form of a practical summary:

Fixed interest rate

Pros:

• **security **– the installment amount remains fixed for at least 24 months, which guarantees you financial security;

• easier household budget planning;

• your creditworthiness will most likely be higher;

• usually lower interest rates – although it is counterintuitive, fixed interest rates are often lower than variable interest rates – the differences can be as high as 0.3% for the same deposit amount.

Cons:

• during periods when interest rates are rising, fixed interest rates may be higher than variable interest rates;

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

• if you want to repay your mortgage quickly, you will usually have to pay an additional fee** (Early Repayment Charge).**

Variable interest rate

Pros

• As interest rates fall, the interest rate on your mortgage will also decrease.

• When interest rate increases are expected, the lender’s margin is usually lower.

Cons

• The amount of the mortgage installment depends on the SVR interest rate, so if the BoE raises interest rates, the monthly mortgage installment increases.

• 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 distinguish a mortgage mortgage with a variable and fixed interest rate;

• The fixed interest rate ensures the same amount of monthly mortgage installments for the time specified in the mortgage agreement;

• The variable interest rate changes every month. It may fall or rise depending on the size of the interest rates set by the Bank of England;

• The interest of fixed-rate mortgage is usually greater than the Standard Variable Rate;

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

FAQ

What is the difference between a fixed interest rate and a variable interest rate?

If you choose a mortgage with a fixed interest rate, you can be sure that the monthly installment will be the same for the duration that was specified in the contract. The variable interest rate depends on several factors, m.in interest rates determined by the BoE, therefore the monthly mortgage installment is variable.

What is the mortgage rate in the UK?

The mortgage interest rate is set by each bank individually. The interest rate includes the reference rate set by the Bank of England and the bank’s margin. On that basis the interest rate is determined on an annual basis.

What type of mortgage interest rate in the UK to choose in 2024?

The type of interest rate on the mortgage depends on several issues. In the case of a fixed interest rate, you can be sure that your monthly installments will be unchanged. On the other hand, in the case of variable interest rates, monthly contributions will change as the interest rate set by the Bank of England fluctuates. The choice of a given interest rate should be analyzed based on the number of installments, mortgage size, bank offer or individual preferences.

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.