How Fixed-Rate Remortgages Work
A fixed-rate remortgage locks in your interest rate for a set period, typically two, three, five or sometimes ten years. During this period, your monthly payment stays exactly the same regardless of what happens to the Bank of England base rate or the wider economy.
This predictability is the primary appeal of fixed-rate deals. You know exactly what your mortgage payment will be each month, making it much easier to budget and plan your finances. There are no surprises, no sudden increases and no need to worry about interest rate announcements.
At the end of the fixed period, your mortgage will usually revert to the lender's standard variable rate (SVR), which is almost always significantly higher than the rate you were paying. This is why most homeowners remortgage again before or shortly after their fixed period ends, to move onto a new competitive deal.
Fixed-rate products typically come with early repayment charges (ERCs) during the fixed period. These are usually between 1% and 5% of the outstanding balance and decrease as you get closer to the end of the term. ERCs mean that leaving a fixed deal early can be costly, so you need to be reasonably confident you will stay for the full term.
In the current UK market, fixed-rate deals are the most popular choice among remortgaging homeowners. The certainty they provide is particularly valued during periods of economic uncertainty or when interest rates are expected to rise. However, if rates fall during your fixed period, you will not benefit from the reduction unless you pay the ERC to switch.
Fixed rates are set by lenders based on swap rates, which reflect market expectations of future interest rates. This means fixed rates can sometimes be higher or lower than current variable rates depending on where the market expects rates to go.
How Variable-Rate Remortgages Work
Variable-rate remortgages have interest rates that can change during the term of the deal. There are several types of variable-rate products, each with different characteristics.
Tracker rates are directly linked to the Bank of England base rate, with a set margin above it. For example, a tracker deal might be base rate plus 0.75%, so if the base rate is 4.5%, you would pay 5.25%. When the base rate changes, your rate changes by exactly the same amount, either up or down. Tracker deals offer transparency because you always know exactly why your rate is what it is.
Discount variable rates offer a set discount below the lender's standard variable rate (SVR) for a specified period. For example, a discount deal might be SVR minus 1.5%. The key difference from tracker rates is that the SVR is set by the lender and can change at any time, not just when the base rate moves. This makes discount rates somewhat less predictable than trackers.
Standard variable rates (SVR) are the default rate that lenders charge when you are not on any special deal. SVRs are typically much higher than introductory fixed or variable rates and are generally not competitive. Most homeowners should avoid staying on their lender's SVR for longer than necessary.
Variable rates can also come with a collar, which is a minimum rate below which your payments cannot fall even if the base rate drops further. Some tracker deals have a floor of zero, meaning you would never pay less than the margin above the base rate, but you would benefit from any base rate reduction down to that point.
Many variable-rate deals do not have early repayment charges, or have lower ERCs than fixed deals. This additional flexibility can be valuable if you think you might want to remortgage again, move house, or make large overpayments during the deal period.
Cost Comparison Over Different Scenarios
The relative cost of fixed versus variable deals depends heavily on what happens to interest rates during your mortgage term. Here are some scenarios to illustrate this.
Scenario 1: Rates stay the same. If interest rates remain stable, a variable-rate deal is often slightly cheaper than a fixed-rate deal for the same period. This is because fixed rates typically include a premium for the certainty they provide. You pay a little extra for the guarantee of knowing your rate will not change.
Scenario 2: Rates rise. If the base rate increases after you take out your deal, a fixed rate protects you from those increases. Your payments stay the same while variable-rate borrowers see their costs go up. In this scenario, the fixed rate saves you money and provides peace of mind.
Scenario 3: Rates fall. If the base rate decreases, variable-rate borrowers benefit from lower payments while fixed-rate borrowers continue paying the same amount. In this scenario, the variable rate is cheaper, and fixed-rate borrowers may feel frustrated watching others save money.
To put some numbers on this, consider a 200,000-pound remortgage over 25 years. The difference between a rate of 4% and 5% on this amount is approximately 125 pounds per month, or 1,500 pounds per year. Over a five-year fixed period, that is a potential difference of 7,500 pounds. These are significant sums, which is why the fixed versus variable decision matters.
It is important to remember that nobody can reliably predict interest rate movements. Economic forecasts are frequently wrong, and unexpected events such as financial crises, pandemics or political upheavals can cause rapid and dramatic rate changes in either direction.
Rather than trying to predict the future, most financial advisers recommend choosing the rate type that best suits your personal circumstances and risk tolerance. If you need certainty and would struggle with higher payments, a fixed rate is likely more appropriate. If you can absorb some variability and want to benefit from potential rate falls, a variable rate may suit you better.
