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How do variable mortgages work?

A variable rate mortgage has an interest rate that can change over time. Your lender might cut the rate due to economic conditions or decide to raise it. This means over a year, your mortgage rate (and your monthly repayments) might increase or decrease.

By comparison, fixed rate mortgages don’t change during the fixed period. This offers more certainty and can be better if you’re on a strict budget. However, variable rates tend to be lower than fixed rates and may have fewer fees. They can also be more flexible.

How do I compare variable rate mortgages?

Consider the following factors when comparing variable rate mortgages:

• Eligibility. Different lenders have different requirements when it comes to the types of properties they will finance and the types of borrowers they accept. Ensure the mortgages you’re comparing are available for your situation, including the type of property, your income source and your deposit size.
• Interest rates. One of the biggest factors to consider is the interest rate. A lower interest rate means lower monthly repayments. It’s a good idea to use a repayment calculator to find out what your repayments will look like with the given interest rate. Add an extra 1% or 2% on top to see what your repayments would be should interest rates rise.
• Fees. As well as the interest rate, it’s important to consider the fees that might be charged. Many mortgages charge an upfront arrangement fee, for instance. In some cases, mortgages with a low interest rate might charge a higher fee, and it could work out cheaper to choose a fee-free mortgage with a higher interest rate. Do some calculations to help you work this out. In addition, there might be fees if you want to exit your mortgage deal early or make overpayments.
• Features. What features you choose to add to your comparison depends on how you want to use your mortgage. If you’d like to use any savings you have to reduce the amount of interest you pay, you could look for an offset mortgage. If you want a mortgage that allows you to make overpayments, look for one that has no restrictions and lets you do this penalty-free.

The pros and cons of variable rate mortgages

To decide if a variable rate mortgage is suitable for you, start by weighing the benefits and risks.

Types of variable rate mortgages

There are a few specific types of variable mortgage rates, with some important differences between them:

• Standard variable rate (SVR) mortgages. This is the rate your lender moves you on to when your current mortgage deal comes to an end – usually after 2,3 or 5 years. The rate is set by the lender, and it can go up or down by any amount at any time. As it’s usually uncompetitive, it’s best to switch to a new deal as soon as possible.
• 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 base rate. This means that if the base rate (which is currently 5.25%) goes up or down, your mortgage lender also adjusts its interest rate accordingly. But it doesn’t mean 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, 2 or 5 years) or for the mortgage’s entire term.

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 standard variable rate mortgages. The difference is that tracker mortgages track the BoE base rate, while a lender’s SVR doesn’t necessarily have any link to the base rate and is decided by the lender.

Tracker mortgages are always a set percentage above the base rate. So, if your mortgage was 1% above it and the base rate was 4.25%, you’d pay 5.25%. If the base rate rose to 5.25%, your mortgage rate would be 6.25%.
By comparison, although an SVR will likely go up and down with the base rate, it doesn’t track it by a set percentage.

Tracker mortgages enable you to benefit from lower rates when the base rate is cut. But they also mean your monthly repayments can shoot up if the base rate rises.

Anyone considering a tracker should try to 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 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. What’s more, SVRs tend to charge higher rates compared to other deals on the market, so it’s best to get off it as soon as you can.

For certainty over your interest payments, a a fixed-rate mortgage, where your rate will be set for an agreed period (often 2, 3 or 5 years) may work better for you. But early repayment fees can be high.

Bottom line

Variable rate mortgages can help to keep your monthly mortgage repayments low when the base rate falls, plus they often allow you to switch deals with no early repayment charge. But if you are thinking about applying, it’s crucial to consider whether you’d be able to afford your repayments if interest rates rose. If you can’t, you might be better off with a fixed rate deal.

More questions about variable rate mortgages

Choosing the right type of mortgage is complex. Here are a few more specific questions and scenarios that might be relevant to you.

• My variable rate has just increased a lot! What should I do?

  Don’t panic. Check the new rate and compare other interest rates. Check if your current lender has a better product, and don’t be afraid to switch to a new lender if you think you’re paying too much.

• Do variable mortgages come with 100% offset accounts?

  An offset account is a transaction account that is attached to your mortgage. It helps you reduce your interest repayments by offsetting your savings against the loan’s principal. Offset accounts aren’t standard features on all variable mortgages, but some lenders offer them.

• My fixed rate loan period has finished, and I'm now on a variable rate. What should I do?

  It’s imperative that you keep track of when the fixed term ends, because after that, your loan will revert to the bank’s SVR. This will typically be a higher rate, so you’ll need to start comparing your options and look to switch to a better deal. This might be with your existing lender, or you might find a more competitive deal elsewhere. There are no penalty fees for switching away from your lender’s SVR.

• What's the difference between a bank and credit union?

  Banks and credit unions are both financial institutions that offer products such as mortgages, personal loans, credit cards and more. The major difference is that a bank is owned by shareholders (for-profit), while a credit union is owned by its members (not-for-profit).

• How much deposit will I need to buy a home?

  This depends on the mortgage and other circumstances, but generally, lenders prefer a deposit of 20%. Some mortgage lenders accept as little as 5%, or even no deposit if you have a guarantor such as a family member who will step in to make repayments if you can’t.

• What happens if I pay my mortgage off early?

  Many mortgage lenders charge a fee for repaying your mortgage early. However, as always, this depends on the lender, so you should read the terms and conditions carefully before applying.

Written by

Matthew Boyle

Publisher

Matthew Boyle is a banking and mortgages publisher at Finder. He has a 7-year history of publishing helpful guides to assist consumers in making better decisions. In his spare time, you will find him walking in the Norfolk countryside admiring the local wildlife. See full bio

Matthew's expertise

Matthew has written 244 Finder guides across topics including:

• Helping first-time buyers apply for a mortgage
• Comparing bank accounts and highlighting useful features
• Publishing easy-to-understand guides