Fixed vs Variable Rate Mortgages: Pros, Cons and How to Choose
Choosing between a fixed and a variable rate is one of the biggest decisions in taking out a mortgage. It affects how much you pay each month, how predictable your budget is and how easy it is to switch or repay early. This guide explains both options and how they work in the US, UK, Canada and Australia.
Quick answer: A fixed rate keeps your interest rate, and usually your payment, the same for a set period, giving certainty. A variable rate can move up or down with market rates, which can save money when rates fall but costs more when they rise. Fixed suits tight budgets; variable suits borrowers with spare room in their budget who value flexibility.
1. How each type works
Fixed rate
Your rate is locked for an agreed period. Your repayments do not change during that time, even if interest rates rise. In return, fixed deals often have early repayment or break costs if you leave early.
Variable rate
Your rate is linked to a lender’s standard rate or a benchmark, such as a central bank rate. When rates change, your payment can change too. Variable loans are often more flexible, with fewer penalties for overpaying or switching.
2. Pros and cons
| Fixed | Variable | |
|---|---|---|
| Payment certainty | High | Low |
| Benefit if rates fall | No (until the fix ends) | Yes |
| Risk if rates rise | Protected during the fix | Payments rise |
| Flexibility to overpay or leave | Often limited, with fees | Usually greater |
3. How it works in each country
- United States: the 30-year fixed-rate mortgage is the most common choice and locks the rate for the whole loan. Adjustable-rate mortgages (ARMs), such as a 5/6 ARM, are fixed for an initial period and then adjust. Many US mortgages have no prepayment penalty, so borrowers can refinance if rates fall.
- United Kingdom: most borrowers choose two- or five-year fixed deals. When a deal ends, the loan moves to the lender’s standard variable rate (SVR), which is usually higher, so most people remortgage. Tracker mortgages follow the Bank of England base rate plus a margin.
- Canada: mortgages are arranged in terms, most commonly five years, within a longer amortization period. Fixed and variable options are both popular, and breaking a fixed term early can trigger an interest rate differential penalty.
- Australia: variable-rate home loans are the most common, often with offset accounts and redraw facilities. Fixed periods are usually one to five years, and leaving early can mean break costs. Some borrowers split their loan between fixed and variable.
4. Questions to ask before you choose
- Could I afford my payments if my rate rose by two or three percentage points?
- Am I likely to move, sell or refinance during the fixed period?
- Do I plan to make overpayments or use an offset account?
- What are the exact early repayment or break costs?
- What rate will apply when the fixed period ends?
5. A middle path: split or shorter fixes
Some lenders let you fix part of the loan and keep the rest variable, giving partial certainty and some flexibility. Others choose a shorter fixed period to avoid being locked in too long. A licensed mortgage broker or adviser can compare deals across lenders.
6. Before you apply
Lenders look closely at your credit history, income, debts and deposit. Our guide to credit scores explains how to check and improve yours. Pay down expensive debt first, and avoid new credit applications in the months before applying. If you need a smaller loan for other costs, read personal loans explained.
Frequently asked questions
Is a fixed or variable rate cheaper?
Neither is always cheaper. It depends on how rates move during your loan. Fixed gives certainty; variable gives flexibility and can cost less if rates fall.
Can I switch from variable to fixed later?
Usually yes, though fees or a new application may apply. Ask your lender.
What happens when my fixed rate ends?
The loan usually moves to the lender’s variable or standard rate unless you choose a new deal or refinance.
What is a break cost?
A fee some lenders charge if you repay or switch a fixed-rate loan before the fixed period ends.