Variable rate mortgages

Last reviewed by John Fraser-Tucker on 1 January 2024

What is a variable rate mortgage?

With a variable rate mortgage your repayments can rise or fall from one month to the next. the amount they change depends on the type of variable rate mortgage you have. 

There are three types of variable rate mortgage. Tracker and discount rate mortgages are similar to fixed-rate mortgages, as they have a set tie-in period with cheaper rates. SVRs (standard variable rates) however do not have an introductory term or rate and are usually the most expensive rate type.

How does a variable rate mortgage differ from a fixed-rate mortgage?

It’s changeable, that’s the main difference. When you take out a fixed mortgage product, you’re paying for the certainty that your mortgage rate won’t change for a set length of time. 

While there are three types of variable rate mortgage, they could all potentially change at any time. That change isn’t always for the worst, but it depends on whether you want to take the risk for a cheaper rate.

What types of variable rate mortgages are there? 

1. Tracker - probably what most people think of when they think of a variable rate mortgage deal. A tracker rate follows an external economic indicator for a set deal period - usually two to five years. This means it only changes when the indicator does during that time. 

2. SVR - a standard variable rate (or SVR) mortgage is the base deal available from every lender. The lender sets the rate themselves, and it's a higher interest rate than other deals, but there is no tie-in period, meaning you’re free to remortgage at any time. This is also what you end up on when any other deal ends, whether it’s fixed or variable

3. Discount - A discount rate is the SVR with a reduction of a certain percentage, so it’s also controlled by the lender. The discounted rate is offered for an introductory period which lasts a set length of time. Sometimes you're tied to discount introductory periods, but not always.

How does the Bank of England base rate affect them? 

Trackers tend to follow the base rate, or a similar indicator. This means that base rate changes directly impact them. For example, A lender might set their tracker at base rate +2% - If the base rate rises you’ll still pay the 2% extra, but on top of whatever the new base rate is. 

SVRs, and by extension, discount rates are likely to be influenced by changes in the base rate. But as lenders factor in their future borrowing costs in advance, you won’t always see an immediate impact in these variable rates when the base rate changes.

All variable mortgage rates could go up or down, but SVR and discount rates are less likely to fall unless there is a major reduction to the base rate - whereas trackers would directly follow reductions.