A variable-rate mortgage is a type of loan with an interest rate that can change over time. This means your monthly payments may fluctuate depending on the lender’s policies or economic factors, most commonly tied to the Bank of England’s base rate.
With variable-rate mortgages, your monthly payment can go up or down, often in response to changes in the base rate. However, some lenders also reserve the right to adjust the rate independently.
Borrowers who choose variable-rate mortgages typically anticipate that interest rates will decrease, helping reduce their monthly payments over time.
Homeowners who prefer a variable rate are often comfortable with the uncertainty that comes from not having a fixed monthly payment.
Types of Variable-Rate Mortgages
Tracker Mortgages
Tracker mortgages follow the Bank of England’s base rate, meaning if the base rate rises or falls, your mortgage rate will do the same. These mortgages are usually set for a specific term, such as two years, after which the loan generally switches to the lender’s standard variable rate (SVR).
Some trackers come with early repayment charges, so exiting the mortgage before the term ends might come with a fee; however, many lenders let customers move from a tracker to a fixed rate, as long as they stay with that lender. In some instances, tracker mortgages do not come with an ERC.
If flexibility is a priority, consider trackers with minimal or no early repayment penalties. To find out what product is right for you, it’s best to speak to a broker. The CeMAP qualified brokers at Your Mortgage People are on hand to help.
Standard Variable Rate (SVR)
An SVR is a variable rate set by the lender, often following trends in the base rate without being directly linked to it. Lenders can adjust the SVR at their discretion, meaning your interest rate could change independently of the base rate. When a fixed-rate or tracker mortgage term expires, borrowers are typically transferred to the lender’s SVR.
SVRs are generally more expensive, so refinancing before being switched to an SVR may save you money.
SVRs also have no ERC, as you’re not on a fixed deal, so you can move to a fixed rate at any time. In fact, it’s something we recommend doing.
Additional Features of Variable-Rate Mortgages
Discount Variable-Rate Mortgages
These mortgages offer a discount off the lender’s SVR. For instance, if the SVR is 4% and your mortgage has a 2% discount, your rate would be 2%. If the SVR increases, your rate will adjust accordingly to reflect the difference of your original policy.
Lifetime Tracker Mortgages
Unlike standard trackers with fixed terms, lifetime trackers follow the base rate for the full duration of the mortgage. Often, these come with no early repayment fees or only initial early repayment penalties.
Mortgage Collars and Caps
Certain variable-rate mortgages include collars or caps to limit rate changes. Collars set a minimum rate, protecting the lender from very low-interest rates.
Caps establish a maximum rate, shielding borrowers from significant increases.
Advantages of Variable-Rate Mortgages
Variable-rate mortgages often have lower interest rates and fees than fixed-rate loans of the same length, especially when the base rate is low.
Another advantage is that some variable-rate mortgages offer greater flexibility in switching, with fewer restrictions and lower or no early repayment fees.
This can be beneficial if you wish to make additional payments or consider other products.
With tracker mortgages, when interest rates fall, so will your monthly payments. For example, with the recent reduction of the base rate, tracker mortgages were reduced to reflect this.
Disadvantages of Variable-Rate Mortgages
The main drawback is uncertainty: if interest rates rise, so will your monthly payments. This unpredictability can be challenging, especially if you’re in a tracker mortgage with early repayment charges that make it costly to switch.
Before committing to any variable-rate product, consider how a potential rate increase could affect your budget. Consulting a mortgage advisor can also help you find options with the right balance of flexibility and affordability.
If you’re on an SVR, you may have more freedom to switch without penalties, but SVRs can be costly.
If you’d like to speak to a CeMAP qualified advisor today, call us on 01489 346624 to get started.
We can search the whole of market on your behalf to find a great deal for you.
