Mortgages
TL;DR
A fixed-rate mortgage locks in your interest rate for a defined period, giving payment certainty regardless of base rate movements. A tracker or variable rate mortgage follows the Bank of England base rate or the lender's own variable rate, so payments rise and fall with market conditions. The right choice depends on your risk tolerance, how long you plan to hold the property, and the current gap between fixed and variable rates.
Key facts (2026)
- The Bank of England base rate is the primary driver of tracker and standard variable rate mortgage costs; it is set by the Monetary Policy Committee at eight scheduled meetings per year (Bank of England, 2026).
- Fixed-rate mortgages typically carry early repayment charges (ERCs) of 1 to 5 percent of the outstanding balance if the borrower exits before the fixed term ends; tracker mortgages are often penalty-free after an initial period (FCA MCOB disclosure rules).
- The FCA requires lenders to stress-test mortgage affordability at a rate above the initial rate, ensuring borrowers can manage payments if rates rise; this applies to both fixed and variable rate products (FCA MCOB 11A).
- Lenders must provide a clear European Standardised Information Sheet (ESIS) before any mortgage offer is made, setting out the rate type, APR, total cost of credit and specific risks of the product (FCA mortgage conduct rules, retained UK law).
- The Financial Ombudsman Service can adjudicate disputes about mortgage rate switching, early repayment charge calculations and product description accuracy (FOS jurisdiction under FCA DISP rules).
How fixed-rate mortgages work
A fixed-rate mortgage sets your interest rate for a defined term - commonly two, three or five years, though ten-year fixes are available from some lenders. During this term, your monthly payment is exactly the same regardless of what the Bank of England base rate does or what the lender's standard variable rate becomes. At the end of the fixed term, the mortgage reverts to the lender's SVR unless you remortgage to a new product. The certainty of fixed-rate payments makes budgeting straightforward, which is particularly valuable for households with tight monthly margins or those in the early years of homeownership when other costs are also high. The trade-off is inflexibility: exiting a fixed-rate mortgage before the term ends typically triggers an early repayment charge, calculated as a percentage of the outstanding balance and often tapering over the fixed term.
How tracker mortgages work
A tracker mortgage is priced at a set margin above a benchmark rate, almost always the Bank of England base rate. If the base rate is 4.75 percent and the tracker is set at base rate plus 0.75 percent, your mortgage rate is 5.50 percent. If the MPC cuts the base rate to 4.25 percent, your rate drops to 5.00 percent without any action required. If the base rate rises, your rate rises immediately. Tracker rates are set at the point of product selection and do not change during the tracker period except as a direct consequence of benchmark rate movements. Most tracker mortgages are available for two to five year initial periods and then revert to the SVR, though lifetime trackers that track the base rate for the full mortgage term are available from some lenders. Tracker mortgages frequently allow unlimited overpayments and have no early repayment charges, making them particularly suitable for borrowers who anticipate selling or remortgaging within a short timeframe.
Standard variable rates: the default position
The standard variable rate (SVR) is the lender's default rate applied when a fixed or tracker initial period ends. SVRs are set entirely at the lender's discretion; they typically move broadly in line with the base rate but not automatically or by the same amount. SVRs are consistently the most expensive rate available from any lender - often 1.5 to 3 percentage points above the best available fixed rates. Remaining on an SVR is almost never cost-optimal; the SVR exists as a default holding position for borrowers who have not yet completed a remortgage. A borrower reverting to an SVR of 7.5 percent on a £250,000 mortgage compared with a remortgage to a 5 percent fix saves approximately £625 per month. Set a remortgage calendar reminder six months before the end of any initial rate period.
When fixed rates make more sense
Fixed rates make more sense when: the gap between available fixed rates and tracker rates is small, meaning you pay little premium for certainty; you have a tight monthly budget and cannot absorb payment increases; you are in the early years of the mortgage when the outstanding balance and therefore the interest cost is highest; or the economic environment suggests that rates are likely to rise during your mortgage term. The certainty premium of a fix is also more valuable for first-time buyers who may be managing other new costs simultaneously. The main risk of fixing is that if rates fall materially during the fixed term, you are paying more than a tracker borrower and cannot benefit without paying the ERC to exit.
When tracker or variable rates make more sense
Tracker rates make more sense when: the spread between fixed and tracker rates is wide, meaning fixed rates carry a substantial premium; you expect rates to fall or stay flat during the period; you plan to sell the property or make a large lump sum overpayment within the next two to three years and want to avoid ERC exposure; or you have sufficient financial cushion to absorb a payment increase of 0.5 to 1 percentage point without stress. The flexibility of tracker products - particularly no early repayment charges - is especially valuable for borrowers in transitional life stages: an expected promotion, inheritance or property downsize within a known timeframe can be planned around a penalty-free tracker in a way that is impossible with a fixed rate.
Comparing total cost, not just the headline rate
The headline interest rate of a mortgage product is only one component of cost. Product fees (arrangement fees, booking fees) are often £999 to £1,999 and can be added to the mortgage or paid upfront; adding them to the mortgage means paying interest on them for the full mortgage term. A product with a lower headline rate but a high arrangement fee may cost more over the term than a higher-rate fee-free product, particularly for shorter initial terms. The Annual Percentage Rate of Charge (APRC), which must be disclosed on every mortgage illustration under FCA rules, provides a standardised total cost figure that includes fees and allows like-for-like comparison. For short fixed terms (two years), the APRC is a more meaningful comparator than the headline rate alone.
Related guides
Frequently asked questions
Can I switch from a tracker to a fixed rate mid-term?
It depends on your mortgage terms. Some tracker products permit switching to a fixed rate without penalty - check your mortgage offer documentation. Others treat a switch to a fixed rate as an early redemption of the tracker product, triggering any applicable ERC. If your tracker has no early repayment charge, switching to a fix is straightforward; if ERCs apply, calculate the total cost of switching - ERC plus any new arrangement fee - against the saving from the fixed rate before proceeding.
What is a collar on a tracker mortgage?
A collar is a minimum rate floor on a tracker mortgage below which the rate cannot fall, even if the benchmark rate drops below a certain level. Collars were common on tracker products sold before 2009 and prevented borrowers from benefiting fully from base rate cuts during the financial crisis. Most tracker products offered since 2015 do not have collars, but check the specific product terms if you are considering a tracker. The FCA requires the collar level to be clearly disclosed in the ESIS before the mortgage offer is made.
Is a two-year fix or a five-year fix better value in 2026?
This depends on the rate differential between two-year and five-year products and your view on where rates will be in two years. In periods where the yield curve is inverted (shorter-term rates higher than longer-term rates), two-year fixes may price more expensively than five-year fixes - an unusual situation that can make longer fixes attractive on a pure cost basis. In a normal yield curve environment, five-year fixes carry a premium for longer certainty. There is no universally correct answer; the decision reflects your specific financial circumstances and risk appetite.
What happens to my mortgage if my lender is sold or goes bust?
Mortgage books are frequently bought and sold between lenders. If your lender sells your mortgage, the terms of your mortgage agreement remain unchanged - you cannot be forced onto a different rate or product as a result of the sale. FCA rules require any new servicer to notify you of the transfer. If a lender enters administration, your mortgage debt is still owed and the administrator will typically sell the book to another firm rather than calling in the loans. FSCS protection covers eligible deposits at your lender but does not cover mortgage balances.
Does the type of rate affect how quickly I build equity?
No, not directly. Equity is built through capital repayments (which are the same in a repayment mortgage regardless of rate type) and house price appreciation. A lower interest rate - whether fixed or tracker - means more of each monthly payment goes to reducing the capital balance, so indirectly a lower rate accelerates equity building. But the rate type (fixed versus tracker) does not in itself affect the split between capital and interest; what matters is the actual rate you are paying at any given time.
How we verified this guide
FCA MCOB rules on stress testing and ESIS requirements were verified against the FCA's current mortgage conduct sourcebook. Bank of England base rate setting process was confirmed from the MPC's published framework. ERC disclosure requirements were cross-referenced with FCA MCOB 5A.
Primary sources
- Bank of England - Monetary policy and base rate
- FCA - Mortgage consumer information
- Financial Ombudsman Service - Mortgage complaints
- MoneyHelper - Fixed or variable rate mortgage guide
- Citizens Advice - Types of mortgages
Last reviewed: May 2026.