Variable rate mortgages explained

Stuart Bowman

3-minute read

Last updated: 5th August 2020

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Many mortgages come with a variable rate. This means you won’t necessarily pay the same amount every month. Your monthly repayments will instead be guided by the type of variable rate mortgage you go for.

This guide explains how these mortgages work, what options are out there, and the pros and cons of choosing a variable rate mortgage.

What’s a variable rate mortgage?

On a variable rate mortgage, the lender is free to change your mortgage rate at any point, which means your repayments can rise or fall from one month to the next. These changes will depend on the type of variable rate mortgage you opt for.

There are three main kinds to choose from:

  • Tracker mortgages that follow the Bank of England’s (BoE) ‘base rate’, which mimics the UK economy. When the base rate rises or falls, your interest follows it.
  • Standard variable rates (SVRs), which make up the bulk of a lender’s mortgage products. They’re set by the lender, and can change at any time. You’ll most likely move from a tracker or fixed rate to an SVR once the term is up.
  • Discount mortgages that cut the rate of a typical SVR. For example, a discount rate mortgage could give you a 1.00% discount on the lender’s SVR of 5.00%, which means you’d pay 4.00%. If the SVR went down to 4.50%, you’d then pay a rate of 3.50%.

The BoE’s base rate can affect an SVR, but not necessarily. Tracker mortgages are useful when the base rate is low for several years, while a discount could last for any period the lender is comfortable with.

When does a variable rate kick in?

Mortgage providers attract new customers with competitive, short-term rates. They may offer a fixed deal for the first couple of years, although it’s possible to get one for up to 10 years until the SVR takes over. Or instead, they can put you on a tracker rate, which again switches to the SVR after the term is up.

During the SVR, you may want to opt out and move to a new mortgage deal. Unlike fixed rate, tracker or discount mortgages, there isn’t an Early Repayment Charge (ERC), so you don’t have to pay to leave before the debt timeline is over. An exit fee might apply, but your mortgage agreement document should outline it – and how much it’ll be.

If you remortgage with someone else or even the same lender, they could offer a better SVR deal. It’s always worth a look.

The drawbacks of variable rate mortgages

By and large, they’re more expensive than what you initially pay monthly on a fixed rate mortgage – the lender can choose to raise the rate whenever they want to.

When on a variable rate, keep a record of any rate changes. If they have risen over and over again, and you think a new lender or fixed rate mortgage may be better for you, it could be time to start looking elsewhere.

The advantages of variable rate mortgages

On the other hand, you can easily get a nice surprise when the tracker or SVR drops. A high fixed rate mortgage will remain high for as long as you’re locked into it.

It’s in the interests of the lender to keep a variable rate competitive – they’ll know you can go to another product if you find something much better.

If you’re unsure whether a variable rate mortgage is right for you, try our Mortgage Matcher. You’ll get a personal mortgage recommendation and expert advice to take you through it all.

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