Fixed vs variable interest rates on loans

A fixed interest rate stays the same for an agreed period, so your repayments do not change. A variable rate can go up or down, so your monthly payment can too. That is the whole choice in one line, and it applies to personal loans, mortgages and most other borrowing.

The trade-off is not simply cheap against expensive. A fixed rate often starts higher than a variable one, and fixed rates are described as giving stability for a time but possibly at a higher rate than you are used to¹. A variable rate can start lower, but it can rise during the loan, and a lender's standard variable rate tends to be significantly higher than the rates on other types of mortgage².

Most mortgages start with a fixed rate for a set period, then move to the lender's standard variable rate. Most personal loans are fixed, though some have variable rates, and there is a risk that a rising rate could become hard to afford. Which suits you depends on how much certainty you need about the monthly payment, and how much you could absorb a rise.

A fixed rate usually costs more at the start

The clearest difference between the two shows up in the first months. A standard variable rate will usually be much higher than an introductory rate on a new deal¹, and staying on it can be more expensive than a fixed or tracker deal⁸. Lenders describe the same pattern: a standard variable rate is usually a higher interest rate than a fixed rate deal⁹.

That gap is not small. Independent analysis measured a 2.71% average difference between standard variable rates and the cheapest deals available to new customers, and noted the difference had grown steadily to that point⁵. The figure dates from July 2018, so treat it as evidence of the pattern rather than a current number.

The same logic runs through other borrowing. Fixed rates give stability for a time but may come with a higher rate than what you are used to¹. On savings, the mirror image applies: a fixed-rate bond usually pays a higher interest rate than an instant access account, and the longer you lock your money in, the higher the rate is likely to be¹⁰. The premium is payment for certainty.

So a fixed rate is not automatically the expensive option. It is the option that prices certainty into the deal. If rates fall after you fix, you have paid for protection you did not need. If rates rise, you have avoided the increase. The cost of that insurance is the higher starting rate.

What a variable rate can do to your repayments

A variable rate is defined as an interest rate that can go up or down, with the amount decided by the lender⁴. On a mortgage, that means your interest rate and monthly payments can go up or down¹¹. The same applies to other borrowing: variable rate interest may change during the agreement, and if the rate is variable your repayments could go up or go down³.

For a household budget, that uncertainty is the point. Loan repayments are usually fixed, but if you are borrowing on a variable interest rate your repayments may change if the bank's interest rate changes¹². A variable rate mortgage means the interest rate and amount you pay each month could go up or down¹³.

Variable rates come in several forms, and they behave differently:

• Tracker rates follow the Bank of England base rate by a set margin, so they move when it moves.
• Discount variable rates give a set discount off the lender's standard variable rate for a period.
• Standard variable rates are the lender's own rate, applied when a fixed, tracker or discount deal ends².

A standard variable rate does not change very often, and it is not directly linked to the base rate, though it is often affected by it¹⁴. Lenders set their own rates, so they are not all the same². That means two borrowers on a standard variable rate with different lenders can see different payments after the same base rate decision.

How fixed and variable rates work on personal loans

Most personal loans are fixed. Fixed rate interest cannot be changed once the agreement is made, and if the rate is fixed your repayments will stay the same³. That is why fixed rates are the usual suggestion for personal borrowing: some personal loans have interest rates that vary, and there is a risk that this could become hard for you to afford¹⁵.

If you are offered a variable rate personal loan, the rate can change at any point, typically reflecting a change in the Bank of England's base rate¹⁶. Your repayments would then move with it. The lender decides how its own rates are set, so the trigger and the timing vary between providers¹⁷.

There is a regulatory layer here that works in your favour. Where the interest rate is variable or is fixed for less than five years, lenders must test whether borrowers could still afford the loan if, at any point in the first five years, interest rates were to rise¹⁸. That affordability test exists precisely because a variable rate can climb after the loan is agreed.

In practice, the questions to ask before signing are: is the rate fixed or variable, how long does any fixed period last, what happens at the end of it, and what would the repayment be if the rate rose. The affordability checks page explains what lenders must assess, and how loan interest is calculated sets out how the rate turns into a monthly figure.

Fixed and variable rates on mortgages

Mortgages are where the choice matters most, because the sums are larger and the term is longer. With a fixed-rate mortgage you pay the same interest rate for an agreed number of years, before going back to the lender's standard variable rate or, if you choose, remortgaging¹⁹. Your interest rate stays the same during the fixed rate period; after that time, unless you take out another mortgage product, a variable interest rate applies for the rest of the mortgage term²⁰.

The main mortgage rate types are fixed rates, tracker rates, discount variable rates and standard variable rates²¹. Interest-only mortgages are available with fixed and variable rates²².

A standard variable rate is a type of variable-rate mortgage, meaning the total amount you pay could change each month². Standard variable rates tend to be significantly higher than the rates on other types of mortgage², and the interest rates are often higher for standard variable rates than for other mortgage types²⁴.

The end of a fixed deal is the moment most borrowers need to act. At the end of your fixed period you will need to remortgage; if you do not, you will be moved to your lender's standard variable rate, which is usually much more expensive¹⁴. When your rate ends you move automatically to a standard variable rate, which usually means paying higher interest than you were previously²⁵. Lenders confirm the same: when a two-year fixed rate ends you are put on the lender's standard variable rate, which is often higher⁶.

Fixed or tracker: how each one behaves

A tracker mortgage moves directly with the Bank of England base rate, so changes to the base rate can mean your interest rate goes up or down, and this only applies if you have a variable rate mortgage²⁶. A standard variable rate is different: it does not track the base rate, but it may change if the base rate changes²⁷. Standard variable rates can be influenced by changes in the Bank of England's base rate², and the rates do not have to follow base rate changes, though they are often influenced by them²⁴.

That distinction matters when you are comparing deals. A tracker gives you a predictable relationship with the base rate: when the base rate moves, your payment moves by the margin. A standard variable rate gives the lender discretion, so the link is looser and the timing is the lender's to decide.

Discount variable rates sit between the two. They apply a discount to the lender's standard variable rate for a set period, so they move when the standard variable rate moves rather than when the base rate moves.

For anyone weighing up a fix, the practical question is what happens if rates rise. Independent guidance notes that while rates are falling, they remain significantly higher than in the 2010s, which means that generally fixed-rate mortgages will offer a better deal²⁸. That is a statement about a particular market at a particular time, not a permanent rule, and it is the kind of judgement that changes as rates change.

Early repayment and switching rates

Leaving a deal early usually costs money, and the size of that cost depends on the type of rate you are on.

On a fixed rate, an early repayment fee is charged if you switch before the fixed rate ends⁶. A 10-year fixed-rate mortgage carries an early repayment fee if you switch while you are on the fixed rate²⁹. One review of competitive 10-year fixes found a 3% early repayment charge in years three to five³⁰. On a fixed rate of at least one year, you may incur an early repayment charge if you repay the mortgage early, convert to a variable rate, or change to another fixed rate³¹.

On a variable rate, the position is usually more flexible. Standard variable rate mortgages tend not to have an early repayment charge, which provides the flexibility to pay off your mortgage quicker². Usually you can switch to a fixed rate without paying an early payment charge³². Tracker borrowers can often switch to a fixed rate deal without an early repayment charge if interest rates go up and they feel they need the stability of a fixed rate³³. Early repayment charges on discounted variable rate mortgages can sometimes be lower than on fixed-rate deals³⁴.

The same pattern appears outside mortgages. On a fixed energy tariff you may have to pay an exit charge to leave early, but not in the last 49 days of your deal³⁵. Fixed-rate savings accounts may charge an interest penalty if you withdraw money or close the account before the fixed period ends³⁶.

If you are weighing up whether to leave a deal early, the paying off a loan early page covers settlement figures, and loan fees and charges sets out the other costs that can attach to an agreement.

Where FSCS protection stops

Protection for borrowers is different from protection for savers. The Financial Services Compensation Scheme covers deposits and investments when a firm fails; it does not cover you against a rate rising or a deal turning out to be more expensive than you expected.

What protects a borrower is the conduct rules and the complaints system. If a lender applies an interest rate in a way you think is wrong, the Financial Ombudsman Service can look at complaints about the interest rates applied to mortgages¹⁹. The ombudsman is free to use and its decisions are binding on the firm.

Affordability rules also protect you at the point of borrowing. Where the interest rate is variable or is fixed for less than five years, lenders must test whether borrowers could still afford the loan if interest rates were to rise at any point in the first five years¹⁸. If a lender did not carry out proper checks, that can be the basis of a complaint. The complaining about lenders page explains how to raise one, and complaining about an unaffordable loan deals with affordability specifically.

Where protection stops is at the market itself. No scheme compensates you because a variable rate rose, or because a fixed rate turned out to be more expensive than a variable one would have been. That risk sits with the borrower, which is why the choice between the two matters.

Where to get free help with loan and debt costs

If repayments become unaffordable, free help exists and it does not cost anything to use. StepChange offers free debt advice online³⁷, and its debt advice is free and impartial³⁸. Free advice services can help if you are struggling³⁹, and free debt advice can help with the stress and worry that comes with it⁷.

The main free providers are:

• StepChange, which offers free debt advice online³⁷
• National Debtline, which gives free advice on debt issues⁴⁰
• The Debt Advice Foundation, which offers free, confidential support⁴¹
• Shelter Scotland, which provides free advice services³⁹

Free advice is also available in Welsh from National Debtline and StepChange¹. If you are in Scotland, the rules and the advice routes differ from England and Wales, and the loans and car finance in Scotland page covers those differences. Northern Ireland has its own arrangements, set out in loans and car finance in Northern Ireland.

Getting advice early gives you more options than waiting until payments are missed. The what to do if you can't repay a loan page sets out the steps, and debt consolidation explains what consolidating does and does not solve. If you are comparing a consolidation loan with free advice, consolidation loan or free debt advice sets the two side by side.