Fixed vs variable rate: how does it change what

2 min read

Fixed = certaintyPayment locked for the term

Variable = movementTracks the base rate

Budget vs riskThe core trade-off

Check for capsSome variables are capped

What each structure does to your payment

On a fixed-rate facility the interest rate — and therefore the monthly payment — is set at outset and does not change for the term. You know the exact total repayable on day one. On a variable-rate facility the rate is usually expressed as the base rate plus a margin, so when the Bank of England moves the base rate, your payment moves with it. The margin stays fixed; the base part floats.

See what happens if rates rise for the downside case.

The trade-off: certainty versus flexibility

Fixed rates buy certainty. For a business planning tight cash flow, knowing the payment cannot rise is worth a lot — you can budget to the penny. Variable rates offer the chance of a lower cost if base rates fall, but expose you to a higher cost if they rise. Whether that is a risk worth taking depends on how much headroom your cash flow has and your view on where rates are heading.

Our full comparison is at fixed or variable — which should I choose.

Reading the small print

Not all variable rates are equal. Some are capped, limiting how high they can go; some have a floor; some can be reviewed by the lender rather than tied purely to the base rate. Read exactly what your rate tracks and whether the lender has discretion. On the fixed side, check whether an early repayment charge applies, as fixed deals are more likely to carry one.

Model both scenarios on the repayment calculator before deciding, then apply.

Frequently asked questions

Which is cheaper, fixed or variable?

Neither is reliably cheaper — it depends on what rates do over your term. Variable can be cheaper if base rates stay flat or fall, and dearer if they rise. Fixed removes that uncertainty at a small premium. For most directors the deciding question is not which is cheaper on average but which risk they can afford to carry.

Can I switch from variable to fixed mid-loan?

Usually not within the same agreement — the rate structure is set at outset. What you can sometimes do is refinance onto a new fixed-rate facility, though that may trigger charges on the old loan and depends on the new deal being better overall. See our answer on refinancing onto better terms.