What is a variable rate mortgage and is it a good idea?

In this article, we explain what a variable rate mortgage is, how the different types work and the advantages and disadvantages of choosing a variable rate mortgage. We also share how to choose the right mortgage for your circumstances.

What is a variable rate mortgage?

A variable rate mortgage charges you interest on your mortgage loan at a rate which is not fixed and can fluctuate from time to time. This means that depending on your variable rate mortgage, your monthly mortgage payment can vary from month to month. There are different types of variable rate mortgages and each type works differently. Variable-rate mortgages differ from fixed-rate mortgages where monthly mortgage payments remain the same for a set period of time.

You can search current variable rate mortgage rates based on your property price and loan amount using our Mortgage rate comparison tool. It can also be helpful to contact a mortgage broker* free of charge who will take you through the various mortgage options that are available to you based on your affordability and attitude to risk. 

What are the different types of variable-rate mortgage?

There are 3 main types of variable-rate mortgages - Standard Variable Rate (SVR), Tracker rate and Discount rate. We explain how these types of variable-rate mortgages work below. 

Standard Variable Rate mortgage (SVR)

• Standard Variable Rates are set by the lender and the lender can change them at any time.
• The SVR is the lender's default rate and is usually the rate that borrowers start paying when a fixed deal comes to an end.
• Standard variable rates do not tend to have a fixed period.
• You are not usually tied into an SVR mortgage so you can move to a fixed-rate mortgage at any time without paying an early repayment charge.
• SVRs are usually higher than fixed-rate deals and most other types of tracker rates.

Tracker rate mortgage

• A tracker rate mortgage follows or tracks a particular base rate at a set amount over the base rate.
• The rate you pay and your monthly repayments will fluctuate each time the base rate changes.
• Tracker rates usually follow the Bank of England base rate so the overall rate is the set amount plus the Bank of England base rate.
• There is usually a collar or floor to this rate so that it cannot dip below a predetermined rate even if the base rate falls.
• Tracker rates can usually be fixed for 2, 3, 5 or 10 years.
• You will usually be required to pay early repayment charges and exit fees if you switch deals before your fixed period expires.

Discount rate mortgage

• Your interest rate will be a set amount below the lender's SVR so the interest rate you pay will change if the SVR changes.
• Discounted rates are usually fixed for 2,3, 5 or 10 years.
• If you switch deals before your fixed period expires, you will usually be required to pay early repayment charges and exit fees.
• There is usually a cap and collar to how much the interest can increase and fall - the cap and the collar are the upper and lower limits beyond which the rate will not change.

What are the pros and cons of variable-rate mortgages?

Variable-rate mortgages aren't for everyone and it is important to weigh up the advantages and disadvantages of this type of mortgage before entering into a mortgage deal.

Pros of variable rate mortgages

• The interest rate that you are charged can fall and lower your monthly mortgage payment
• A cap to your variable rate could ensure that the interest rate is limited in how much it can increase, safeguarding you against excessive interest rate rises
• Your variable-rate mortgage deal is likely to be cheaper than a fixed-rate mortgage deal
• A standard variable rate mortgage does not lock you in for any fixed period which means that you can switch to a fixed deal or any other deal without paying an early repayment charge

Cons of variable rate mortgages

• Your monthly mortgage payment can change if your interest rate changes which can make budgeting difficult
• You may not benefit from excessive interest rate reductions if your variable rate comes with a collar that prevents the interest you pay from falling below a lower limit
• You may have to pay an early repayment charge or exit fee to switch from a tracker or discount rate mortgage to a better rate

Should you get a variable-rate mortgage?

Often, you will find that variable-rate mortgages are cheaper than fixed-rate deals so you may find that you pay less each month for your mortgage. This is because you are paying extra on a fixed-rate deal for the certainty of monthly payments that will not change. If you are a speculative borrower who has space in their budget to allow for interest rate rises, you may wish to opt for a variable-rate mortgage because the rate can also go down if interest rates move in that direction. You can find predictions on whether interest rates will rise or fall in our article, "When will interest rates rise or be cut- latest predictions".

You should consider a variable-rate mortgage if you wish to benefit from falling interest rates and are not put off by the possibility that rates could also rise. But it is important that you have space in your budget to adapt to any change to your mortgage payments. So, it's a good idea to work out how much your mortgage payment would change if interest rates were to rise by a few percentage points - if you are comfortable with this then a variable-rate mortgage may be for you. When looking to take out a mortgage it is best to speak to a mortgage broker* who can help you to compare the terms and conditions of your mortgage.

How to choose the right mortgage for you

Whether you are buying a property or remortgaging your existing mortgage contract to a new deal, choosing the best type of mortgage will be a key decision you make. Now that you understand the pros and cons of a variable-rate mortgage, do also compare fixed-rate mortgages so that you can explore the differences between each mortgage type.

The best way to weigh up your mortgage options based on your specific needs and circumstances is to speak with a mortgage expert. At Money to the Masses we have vetted the services of the online mortgage broker, Habito* which has access to over 90 mortgage lenders and over 20,000 mortgage deals. Habito won't charge a fee and the advisers are trained to provide bespoke mortgage advice that is easy to access. You can also search for a mortgage broker in your local area that has been vetted by other users by searching the VouchedFor* site - a review-led directory of mortgage advisers near you.

Getting professional advice to choose your mortgage deal can provide you with access to mortgage deals that are only available through a mortgage broker while giving you peace of mind that you have weighed up your mortgage options appropriately. You could save thousands of pounds over the course of your mortgage by selecting the best mortgage rates.

 

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