Fixed or variable: what you are really buying

Choosing between a fixed and a variable mortgage is not a bet on where rates go. It is a decision about who carries the risk of being wrong, and how much certainty is worth to a household that has to keep paying either way.

What the fixed rate contains

A lender funding a fixed-rate loan must hedge it. The cost of that hedge, plus a margin for the option value you receive, is embedded in the quoted rate. Fixed pricing therefore reflects expectations of future rates plus a premium — which is why fixed can sit above variable even when cuts are expected.

The clauses that matter more than the rate

• Early repayment charges: how much it costs to exit or overpay during the fixed term.
• Portability: whether the deal can move with you to a new property.
• Overpayment allowance: usually a percentage of the balance each year.
• Reversion rate: what the loan rolls onto when the deal ends, and how it is set.

Renewal risk is the real exposure

A short fix is not low risk; it is deferred risk with a known date. Lining up the end of the fixed period against expected changes in income, family size or job security is more useful than trying to time the rate cycle.