Fixed Mortgages Vs. Discount Variable Mortgages: What’s Right For You?

By Tom Horsey 1 September 2022

One question our Yeovil mortgage advisors hear often at the moment is ‘which is better between a fixed mortgage and a discount variable mortgage’? Of course, like any other financial matter, the answer is not as clear cut as simply saying one is superior to the other.

However, given that people across the country are struggling to cope with rising energy costs, as well as figuring out what this year’s base rate rises means for them, we thought we’d do our part to help out and explain the benefits and drawbacks to these two types of mortgage, so you can make an informed decision for yourself.

What Is A Fixed Rate Mortgage?
What Is A Discount Variable Mortgage?
Discount Variable Vs. Fixed Mortgages
What Our Yeovil Mortgage Advisors Say
Yeovil Mortgage Advisors To Help You Get The Right Deal

What Is A Fixed Rate Mortgage?

Any discussion of costs and benefits can only begin after first defining exactly what we’re talking about. Fortunately, with their years of experience in the financial sector, our Yeovil mortgage advisors at The Levels Financial are perfectly positioned to explain this clearly.

A fixed rate mortgage is one where the interest rate stays the same for an initial specified period.

What this means is that you’ll be paying the exact same amount on your mortgage every single month, regardless of exterior pressures such as base rate rises. Of course, this fixing of your mortgage payments cuts both ways. If the base rate goes down, your repayments will remain the same.

Typically, you can fix the rate on your mortgage for between two and five years; though longer-term deals do exist, they are less common. When the fixed rate ends and you have not yet signed a new mortgage agreement, you’ll usually switch to paying a standard variable rate mortgage.

Brick houses with green bushes and clear blue sky

What Is A Discount Variable Mortgage?

To explain what a discount variable mortgage is, our Yeovil mortgage advisors must first explain what a standard variable rate mortgage is.

Put simply, all mortgage lenders have a standard variable rate (SVR), which refers to an interest rate set at their discretion. This will typically be affected by changes in the base rate, but is not directly tied to it like a tracker mortgage. A standard variable rate mortgage is therefore one that is tied to the lender’s standard variable rate. In some ways this can be considered the “default” in that it is what your deal reverts to when your fixed or tracker deal comes to an end.

As you might expect, a discount variable mortgage sets the rate of interest you would pay at an amount below the lender’s standard variable rate for the duration of the deal. However, it differs from a fixed mortgage in that it will still increase or decrease if the SVR changes, albeit at a discounted rate.

As an example, if the lender has a standard variable rate of 3%, and your discount is 1%, then the interest you pay will be 2%. If at some point during your deal the SVR increases to 6%, then you will pay 5%. However, in the same way, if the SVR decreases to 2%, then you will only need to pay 1% interest.

Discount Variable Vs. Fixed Mortgages

The right mortgage deal is different for every person, because everyone has a different financial situation. It’s for that reason that our Yeovil mortgage advisors work so hard to understand the needs of our clients so we can advise the most suitable product. That said, there are some broad-stroke positives and negatives to these two mortgage types that you can consider for yourself before contacting us.

Benefits Of A Fixed Rate Mortgage

Given that fixed rate deals are found in roughly 75% of UK mortgages (expatica), it is no surprise that they come with a number of positives. In their experience working with clients and lenders, our mortgage advisors in Yeovil find these are the most salient benefits of fixed rate mortgages:

Monthly Repayments Are Consistent – Uncertainty is one of the most difficult factors to manage when planning your finances. Knowing that your mortgage repayments will be the same every month can be a considerable boon to your financial planning.

You Are Not Affected By Base Rate Rises – Anyone who has been keeping an eye on financial news this year knows this is a perk not to be underestimated. The Bank of England’s base rate saw the largest increase in 27 years this summer, but if you were on a fixed rate mortgage, this won’t have affected your interest payments at all.

Interest Is Calculated On The Remaining Sum – Because interest is a percentage of the remaining sum of your loan, you will often pay the greatest amount of interest at the start of your mortgage. Because your interest rate will be fixed for this period, there is potential to make considerable savings on your interest repayments with the right deal.

You Choose How Long Your Mortgage Is Fixed – Typically, you will have the option of choosing a two, three or five year fixed term for your mortgage, so you can decide what is best for you. There are also longer term fixed deals of up to ten years, but this is less common.

Drawbacks Of A Fixed Rate Mortgage

Of course, there are a number of drawbacks to fixed rate mortgages too. Here are the ones our Yeovil mortgage advisors think you should be most wary of:

You Won’t Benefit From A Reduced SVR – As we explained in the previous section, if the interest rates go down, you will not gain any benefit in reduced payments. Fixing your mortgage goes both ways, so you could potentially lose out on a cheaper deal if the base rate goes down.

Early Repayment Charges – Typically, you will not be able to exit the fixed term duration of your mortgage deal without an early repayment charge. This can be an unwelcome expense, and can be particularly costly if you still owe a large amount.

Less Flexibility – In much the same way, you will have less options if you want to make changes to your mortgage. As such, you should be sure you’ll want to remain in the current property for the duration of the fixed term to avoid potentially high costs for transferring.

Switching To An SVR Mortgage At The Term’s End – Once the fixed term of your mortgage ends, if you haven’t properly prepared for remortgaging, then you could be in for a nasty surprise. This could be a particularly jarring shock if, like this year, the base rate (and by consequence the SVR) has risen steadily throughout the duration of your fixed term. Unlike those who experienced the rise incrementally, you could get a sudden shock all at once when your fixed term ends.

Semi-detached brick houses

Benefits Of A Discount Variable Mortgage

It can be very difficult to figure out what deal is right for you without the help of an expert. However, in general terms, these are what our Yeovil mortgage advice experts think are the key benefits of discount variable mortgages:

You Pay A Lower Interest Rate Than SVR – For the duration of your deal, you’ll pay less than the lender’s SVR. This can result in considerable savings on mortgage payments, particularly if interest rates do not rise. If that were the case, you would save more than someone on a fixed rate mortgage.

Potential Savings If The Base Rate Lowers – While you could pay more if the base rate continues to rise, you will also benefit from lower interest rates if your lender lowers their SVR in response to a reduction in the base rate.

Lower Early Repayment Charges – You will usually have lower early repayment charges with a discount variable mortgage than you do with a fixed rate mortgage, giving you more flexibility in paying off your mortgage early if you decide to do so.

Reduced Arrangement Fees – There are often additional fees charged by the lender for arranging a mortgage. These are usually lower for a discount variable mortgage than for a fixed rate mortgage. For either type, it’s important to work out if an attractive deal is actually as good as it seems, as these additional fees can be significant in many cases.

Drawbacks To A Discount Variable Mortgage

Anyone who has come to understand the format of this article will have seen these coming. Discount variable mortgages certainly have their drawbacks as well. According to our Yeovil mortgage advisors, these are the most relevant:

Monthly Payments Aren’t Fixed – This should come as no surprise after reading the previous sections, but the impact this can have on your finances shouldn’t be underestimated. The fact an SVR increase of even 0.5% can have a noticeable impact on your monthly repayments can be difficult to manage.

“Collared” Savings – While this will vary with your lender, many have limits on how low your interest rate can get. So, even if the SVR drops to an amazingly low level, you are limited in how much that will benefit your interest rate.

Switching To An SVR Mortgage At The Term’s End – In just the same way as with a fixed term mortgage, you will revert to an SVR mortgage at the end of your discount deal. While this shock is less likely to be as stark as with a fixed rate mortgage, you can still face sharp increases in your monthly payments if you haven’t prepared accordingly.

What Our Yeovil Mortgage Advisors Say

If you’ve read through the positives and negatives for each of these two choices, then it should be clear that the main difference between a fixed rate mortgage and a discount variable mortgage is that of volatility.

A fixed rate mortgage allows you to have peace of mind in that your payments will not change with the SVR. However, this means you won’t benefit from decreases to the SVR as well. Moreover, with that rigidity comes inflexibility, you will be less able to respond to changes in your own financial situation during the fixed term, such as if you get a promotion and want to pay off the mortgage early.

By contrast, a discount variable rate mortgage is less stable. You will incur increased costs if the standard variable rate increases (though not as much as those on an SVR or tracker mortgage), but you will also benefit from reductions in the SVR. In addition, you have a greater ability to respond to changes in your financial situation such as in paying your mortgage off early.

In summary, in very basic terms, the discussion boils down to flexibility vs. stability.

Yeovil Mortgage Advisors To Help You Get The Right Deal

While you may have some idea as to which suits you better, it’s important to talk it through with our expert Yeovil mortgage advisors. Our professional help can help ensure you get the right deal for your financial situation, whether it’s a fixed rate mortgage or discount variable mortgage.

With access to more than 12,000 mortgage products from over 90 lenders, we can help you to find the right mortgage. Contact us today on 01458 772 040 or by email at admin@thelevelsfinancial.co.uk to arrange a consultation and to discover how we can help you.