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Published: 29/08/2017
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First-time buyers (FTBs) looking for a mortgage may instinctively opt for a fixed rate deal to give them the peace of mind of knowing their monthly repayments won't change even if base rate rises, yet this may not always be the most cost-effective choice, as rates can often be higher for this type of deal.

Our latest research shows that FTBs may actually be significantly better off if they were to opt for a discounted variable rate deal instead of a fixed rate mortgage, as the average fixed rate at 95% loan-to-value (LTV) is 0.82% more expensive than the current average discounted variable rate. This gap has doubled in the last six months as rates at higher LTVs have begun to edge up, with these now higher than they were at this time last year.

The table below highlights the changes in more detail:

Average Rates at 95% LTV A Year Ago 6 Months Ago Today
Two-year Discounted Variable Rate 3.41% 3.51% 3.34%
Two-year Fixed Rate 4.03% 3.92% 4.16%
Difference -0.62% -0.41% -0.82%

"Despite the array of options available to first-time buyers, many tend to stick to fixed rate mortgages not just as they are the simplest to understand, but also because they are a great way for usually cash-strapped FTBs to manage their money," said Charlotte Nelson, finance expert at "However, as fixed rates for those at 95% LTV are on the rise, ignoring other options can be a costly mistake.

"Fixed rates for first-time buyers are going up, with the average two-year fixed rate at 95% LTV well above last year's figure. In contrast, the average rate for discounted variable deals is still falling, and while the difference between the two rates was already clear to see in previous months, it has now risen to a whopping 0.82%."

As Charlotte explains, the low rates offered on discounted deals could be a great way for FTBs to minimise their monthly repayments – our calculations show that borrowers opting for the average two-year discounted variable rate at 95% LTV instead of the average two-year fixed rate will be £89.25 a month or £1,071 a year better off, based on a £200,000 mortgage over a 25-year term on a repayment-only basis.

However, you need to weigh up the promise of lower rates now compared with the potential for them to rise in the future. Discounted variable rates generally offer a discount on the lender's Standard Variable Rate (SVR), and because of that, there's the potential for rates to rise if base rate does. Fixed rates, on the other hand, are set in stone, no matter what happens to base rate during the course of the mortgage term.

Nonetheless, given the current difference between the two averages, FTBs could still find themselves better off even if base rate were to increase by 0.50%, so it could still work out as the more cost-effective choice for the next few years.

Ultimately, it all comes down to what works best for your circumstances. "It can be a difficult process, puzzling through the mortgage maze when you are new to the environment," said Charlotte, "which is why any prospective first-time buyer unsure of what deal to opt for should seek advice from a financial adviser."

What next?

Check out the top discounted variable rate mortgages to see the kind of deals available

Want the security of a fixed rate? Compare fixed rate mortgages instead

Find the best first-time buyer mortgages


Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time. Links to third parties on this page are paid for by the third party. You can find out more about the individual products by visiting their site. will receive a small payment if you use their services after you click through to their site. All information is subject to change without notice. Please check all terms before making any decisions. This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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