Variable rate mortgages, as the name suggests, have an interest rate that can and will fluctuate over the lifetime of the mortgage. These mortgages can be influenced by changes in the Bank of England base rate, but there are other factors that can also influence the rate, such as the lender managing risk, or changes in the economy. This guide will explain the features of variable rate mortgages and why they might be the right product for you, or not.
A variable rate mortgage has an interest rate which can change over time. Your lender might cut the rate due to economic conditions, or decide to raise it. This means over the course of a year, your mortgage rate (and your periodic repayments) might increase or decrease. Fixed rate mortgages don’t change during the fixed period, offering more certainty but less flexibility. Variable rates tend to be lower than fixed rates and may have fewer fees.
Consider the following factors when comparing variable mortgage rates:
- Eligibility. Different lenders will put limitations on what types of properties they will finance and the types of borrowers they will accept. Ensure the mortgages you’re comparing are available for your situation, including the type and size of the property, your income source and your loan purpose.
- Interest rates. A lower interest rate means lower repayments. This is easily the biggest factor. It’s also a good idea to use a repayment calculator to find out what your repayments will look like with the given interest rate, and also add an extra 1% on top of this to see what your repayments would be should interest rates rise.
- Fees. A variable rate mortgage can come with a range of fees including upfront application fees or ongoing fees, as well as fees to use features such as offset accounts. Ensure that the fees justify the interest rate and features you’ll receive with the loan. This is why you should always pay attention to a loan’s comparison rate, which takes into account its interest rate plus fees.
- Features. What features you choose to add to your comparison will depend on how you want to use your mortgage. If you prefer to use your salary to minimise the interest charged, you might want to look for an offset account. If you want a mortgage that allows you to make unlimited additional repayments, you might want to look for mortgages with a free redraw facility.
What is an Offset Account
These are mortgages which are linked to your savings account. Your savings will be offset against the value of your mortgage so you’ll only pay interest on your mortgage balance minus your savings balance effectively reducing the amount of interest you pay. Your savings won’t be used to repay any of your mortgage they just save you interest.
To decide if a variable rate is suitable for you, start by weighing the benefits and risks. This depends heavily on your property needs and strategy.
- Features. Many variable rate mortgages come with useful features, such as the ability to make additional repayments and offset accounts. It’s harder to find a fixed rate with these features.
- Easy to remortgage. When you opt for a variable rate loan, you have the flexibility to remortgage with another lender in order to secure a more competitive deal. However, with a fixed rate product, you often need to pay high discharge fees to exit the loan.
- Falling interest rates. If interest rates fall, a variable loan will save you money if your lender decides to pass on the cut (they often do).
- Interest rate rise. An interest rate rise on a variable rate mortgage would make your repayments more expensive, and could make it more difficult to service your loan.
- Difficult to budget. If your rate is fluctuating regularly, it can be difficult to plan an accurate budget. You might have less money to allocate to other expenses if your mortgage repayment rises.
There are a few specific types of variable mortgage rates, with some important differences between them:
- Standard variable rate (SVR) mortgages. This is your basic variable rate mortgage in which the SVR you are charged is set by the lender, who can raise or lower it by any amount, at any time.
- Tracker mortgages. This is a type of variable rate mortgage in which the interest rate you are charged tracks another rate, usually the Bank of England (BoE) base rate. This means that if the BoE raises or lowers the base rate (which is currently 5.25%), your mortgage lender will also adjust its interest rate accordingly. But it does not mean that your provider will match the rate set by the BoE – usually most mortgage lenders set their interest rates at a certain margin above the BoE base rate.
- Discount rate mortgages. This is another type of variable rate mortgage in which the mortgage lender gives you a discount on its standard variable rate for either a set period (for example, two or five years) or for the entire term of the mortgage.
If you’re looking for a more specialised type of variable mortgage like some of the ones listed above, you should consider contacting a mortgage broker to get some free, expert guidance.
What is the difference between an SVR and a tracker rate?
Tracker rate mortgages work in a similar way to variable rate mortgages. The difference is that the mortgage tracks the Bank of England base rate rather than the lender’s SVR.
The advantage is that you are guaranteed to benefit from the full effect of any rate cut. This is because lenders frequently short-change borrowers when reducing their SVR.
But you are also guaranteed to feel the pain of rate rises if you’re on a tracker rate mortgage.
Anyone considering a tracker should try and secure one with either no early repayment charge, making it free to leave for another deal, or with a cap on how high rates can go.
While your tracker mortgage rate is low, you can take the opportunity to overpay on your mortgage, shortening the total length of time it takes you to pay off your mortgage and cutting the amount of interest you pay.
Standard variable rate vs fixed-rate mortgages
An SVR mortgage offers you flexibility since you can generally remortgage or change lenders without facing a fee. However, the amount you pay in interest each month can change, so you need to make sure you can afford the rate even if it increases in the future.
For certainty over your interest payments, a fixed-rate mortgage, where your rate will be set for an agreed period (often two or five years) may work better for you.
Choosing the right type of mortgage is complex. Here are few more specific questions and scenarios that might be relevant to you.
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