What is a variable rate mortgage?

How variable rates differ from fixed rates

When you take out a mortgage, you’ll be able to choose a fixed or variable rate mortgage.

Fixed mortgage have interest rates that are set for a period of time. They let you know exactly what you’ll pay each month for the whole fixed period.

With a variable rate mortgage, the interest rate can change at any point of the mortgage. This means your monthly payments could change.

Variable rates can be cheaper than fixed

Variable rates are not a bad option. If rates drop, they can be cheaper than similar deals on a fixed rate.

In July 2019 most 2 year rates were 2.01% compared to 2.49% for 2-year fixed rates.

Most variable products have a ‘discounted’ or low-rate period for a set duration of time. You can take out a new deal like a fixed rate mortgage when this period ends.

Be careful of Standard Variable Rates (SVR). They often have higher rates that lenders use when a fixed rate, tracker, or discount detail ends.

It can be cheaper to stay on this rate as there is no Early Repayment Charge. If you're not sure, look into your options before you’re moved onto a SVR rate.

Types of variable rate mortgages

Tracker mortgages

With tracker mortgages, the interest your lender charges is the Bank of England base rate plus or minus a certain percentage.

Products usually last two or five years but you can also get three year, 10-year, and ‘lifetime trackers’. These track the base rate for the lifetime of the mortgage.

Your tracker mortgage could include a minimum interest rate, or 'collar'. The interest rate will never fall below this so the lender will always make some profit. Some lenders will also have a cap to restrict the maximum rate.

Some tracker mortgages have no Early Repayment Charges. This allows you to make larger overpayments or repay the mortgage in full without a penalty. More tracker deals let you do this, but some fixed deals will too.

Discounted variable rate mortgages

These mortgages are like tracker mortgages but are discounted against the lender's SVR.

Your lender can choose to raise their SVR at any time.

Most lenders only change the SVR if the Bank of England base rate rises or falls.

You often lock onto discount mortgage rates for a fixed term, lasting two, three or five years.

Standard Variable Rate (SVR) mortgages

Every lender has its own Standard Variable Rate. These are often not competitive. The average SVR is 4.89% but you can switch to another deal without facing any charges. (1)

Customers often roll onto an SVR after their fixed rate, tracker or discount period ends.

Since 23 January 2018 Santander customers have rolled onto a ‘Follow-on Rate’. This is more competitive than its SVR. (4)

Variable rate mortgage deals

These deals are based on securing a mortgage of £181,600 on a £227,000 property (80% loan-to-value) over a 25 year term.

We’ve searched for the most competitive deals according to true-cost.

True cost includes capital and interest repayments, fees, and incentives due over the initial period of the deal. It's a more effective way of comparing deals than looking for the lowest interest rate deal.

2 year tracker deal (first-time buyer)

£18,100.20

True cost over initial period

£749.55

Monthly payment

Details

Based on securing a mortgage of £181,600 over a 25 year term. Includes £111 upfront fee. 1.77% initial rate reverts to 4.99% SVR after initial 24 month period, costing £1,035.75 per month for 276 months. Total amount payable is £304,032.20 including interest and fees. That's a 4.50% APRC. True cost based on a 24 month period. This deal was last updated on 1st March 2019.

2 year tracker deal (remortgage)

£17,995.20

True cost over initial period

£749.55

Monthly payment

Details

Based on securing a mortgage of £181,600 over a 25 year term. Includes £6 upfront fee. 1.77% initial rate reverts to 4.99% SVR after initial 24 month period, costing £1,035.75 per month for 276 months. Total amount payable is £303,927.20 including interest and fees. That's a 4.50% APRC. True cost based on a 24 month period. This deal was last updated on 1st March 2019.

Advantages of variable rate mortgages

With a variable rate mortgage you can take advantage of some of the lowest rate deals on the market. You would risk some uncertainty about your future rate.

The base rate stayed at 0.5% from 2009 to 2015, before falling to 0.25% in 2016.

Those who took out a tracker or discount mortgage over the period likely paid less than those on a fixed rate. This generally has a higher rate the longer you fix for.

If the base rate falls, your mortgage rate will also fall.

Disadvantages of variable rate mortgages

If the bank rate or SVR rises then your monthly repayments will increase too.

You will not have any certainty that your mortgage will be the same price over the term.

Some tracker rate mortgages may also need you to pay an Early Repayment Charge.

Predicting the Bank of England base rate

When choosing between a variable or fixed rate, a lot depends on what you think will happen in the financial market and the Bank of England base rate.

If you think the rate is likely to rise soon, a fixed rate may be a better option.

If you think the Bank of England is likely to keep them the same, or lower them more, a variable rate might make sense.

There are competitive products in both categories.

Brexit

With Brexit uncertainty, some borrowers are cautious and seeking longer-term fixes. (5)

A fixed rate option could be better if you want to be certain about your payments no matter what happens to the economy.

The Bank of England tends to keep the base rate lower for longer in times of economic uncertainty. So some may argue that the rate could stay at new lows for a while as the road ahead for Brexit is unclear.

Based on that argument, a variable could make more sense.

Choosing between a fixed and a variable is your decision and depends on your own circumstances.

What to be aware of when coming to the end of your initial term

Once your initial term is over, you're likely to end up paying the lender's SVR.

If you’ve signed up to Trussle, we’ll let you know when it makes sense to think about switching. This way you can avoid paying the SVR, if you choose to look at other deals.

If you use Trussle to find a mortgage, we’ll look at both variable and fixed rate options to recommend a deal. We'll base the deal on what we think would best suit your needs.

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