If you’re a first-time buyer looking to secure a mortgage deal or an existing homeowner considering a remortgage, you might have heard the term variable rate mortgage floating around. But what exactly is a variable rate mortgage? And what are the benefits and considerations? We’ll walk you through everything you need to know so that you can start thinking about what the right mortgage deal is for you.
What is a Variable Rate Mortgage?
A variable rate mortgage is a mortgage whereby the interest rates can fluctuate at any time. As opposed to a fixed-rate mortgage, monthly payments for variable rate mortgages are not fixed and can rise and fall according to interest rates, such as the Bank of England’s base rate or the rate set by your lender.
Variable rate mortgages come in several forms. We will talk you through the different types of variable rate mortgage below.
Types of Variable Rate Mortgages
There are three main types of variable rate mortgages: standard variable rate (SVR) mortgages, tracker rate mortgages and discounted rate mortgages.
Standard Variable Rate (SVR) Mortgage
A standard variable rate (SVR) mortgage refers to the rate you pay on your mortgage once your initial fixed or tracker rate mortgage deal ends. This type of mortgage can rise and fall at a rate specified by your lender, typically in line with the Bank of England’s base rate.
SVR mortgages are generally less predictable as your lender can change their interest rates at any time. These are usually higher than the rate on your fixed-rate mortgage.
Tracker Rate Mortgage
A tracker mortgage is a type of variable rate mortgage that follows the trends of an external rate (usually the Bank of England’s base rate), plus a set percentage added by your lender, either for a fixed period or indefinitely.
The repayments on your tracker mortgage will rise or fall depending on the economic climate, usually a month after the base rate moves.
For example, if the Bank of England’s base rate is 5%, your lender may offer you a tracker mortgage at 6%. If the base rate rises to 6%, your tracker mortgage will move in line with this up to 7%. Likewise, should the base rate fall to 4%, your tracker mortgage will fall in line with this to 5%.
Some tracker mortgage deals have what’s known as an interest rate collar, which is a minimum percentage that your rate cannot fall below, even if the Bank of England’s base rate drops below it.
Many borrowers opt for a tracker rate mortgage to avoid being tied into a fixed rate mortgage. This is especially popular at times where the Bank of England’s base rate is projected to fall.
Should interest rates begin to rise, you may wish to swap from a tracker mortgage onto a fixed-rate mortgage. Some lenders will allow you to do this without penalty, while others may impose a financial penalty for early exit.
Discounted Rate Mortgage
With a discounted rate mortgage, you typically pay a discounted rate on your lender’s standard variable rate for a fixed term, usually two to five years.
It’s important to note that while you’ll be paying a lower, discounted rate on your SVR, your monthly repayments will still change depending on whether the SVR goes up or down. Some discounted rate mortgages also have an interest rate collar, meaning your interest rate can’t fall below a certain percentage.
Why Choose a Variable Rate Mortgage?
When considering a variable rate mortgage, it’s important to weigh up the potential benefits against the possible drawbacks carefully. Understanding these will help you decide whether a variable rate mortgage aligns with your financial situation and long-term goals.
One of the main advantages of choosing a variable rate mortgage is the potential for lower monthly payments. If interest rates are constantly declining, your payments will decrease, saving you more money over time. However, it’s important to recognise that this option comes with a degree of risk, as rising interest rates will lead to higher monthly payments. This is why some borrowers prefer the stability of a fixed-rate mortgage.
Another advantage is that in many cases lenders will not penalise you for overpaying your mortgage, meaning you could be mortgage free sooner, or for moving to another lender.
The biggest reason many will opt for a variable rate mortgage, however, is if a major life change is soon expected. For example, if a growing family leads to the desire to relocate to a larger property in the near future, remortgaging to a variable rate mortgage offers the flexibility to find and move into a new house at a time that suits you as you won’t be locked into a fixed term, potentially with early repayment charges.
Interest rates are higher with variable rate mortgages, so it’s important to consider whether this is a cost-effective option for you. You may find that remortgaging to a new deal saves you more money.
Is a Variable Rate Mortgage Right for You?
Whether or not a variable rate mortgage is right for you depends on your personal circumstances and goals.
If you have more flexibility in your budget and are comfortable with the possibility of fluctuating monthly payments, a variable rate mortgage may be a good fit for you. Additionally, if you intend to pay off your mortgage over a shorter period, the flexibility to overpay may make a variable rate mortgage appealing.
However, if you require more stability and certainty – perhaps because you’re managing a tight budget or prefer to know how much you’re paying per month – a variable rate mortgage might not be your first choice. You may consider taking out a fixed-rate mortgage for better peace of mind.
How Cooper Associates Can Help
Choosing a mortgage deal can be overwhelming, but Cooper Associates is here to help. Whether you’re buying your first home or remortgaging your property, our award-winning mortgage advisers will help you navigate the complexities of variable rate mortgages by offering personalised advice and comparing the best available rates in the market.
We have access to a wide range of mortgage products, allowing us to match you with the best option for your needs. Our commitment to transparency means you’ll always understand the benefits and risks associated with your choices. With Cooper Associates by your side, you can be confident you’re making the best decision for you. Get in touch with one of our advisers today.
In the meantime, take a look at our Mortgage Calculator to get an idea of how much you could be paying back on your monthly mortgage payments.
