What is a variable rate mortgage?
When you come to take out a mortgage, you’ll typically see options for fixed and variable rate mortgages as the primary categories on offer.
With a fixed mortgage, the interest rate is set for a period of time and you know exactly what you’ll pay each month for the duration of that period.
But with a variable rate mortgage, the interest rate can fluctuate during the duration of the mortgage, meaning your monthly payments could change with little warning.
Some types of variable rate mortgage typically have lower rates than a fixed mortgage, and are often seen as an attractive option for the reason. However, a Standard Variable Rate will in most cases be higher than a fixed rate.
What causes the variable mortgage rate to change?
Each lender will have its own criteria for setting their variable interest rates, but typically their variable rates are defined by The Bank of England’s interest rate, market trends, and wider factors in the UK's economy.
The rate that you pay will be decided by your lender, who will inform you when changes to the rate - and your monthly payments - are due to occur.
Some variable rate mortgages have an introductory discounted figure which acts as an incentive to the borrower when weighing up the different mortgage products on the market. However, even when the introductory discounted interest rate is factored in, borrowers will typically not be 100% certain of the exact figure that they will be charged each month.
The main types of variable rate mortgages that you should know about are:
Tracker mortgages follow The Bank of England's centrally-set interest rate, and lenders will charge a certain percent above this rate. This means that when The Bank of England’s Monetary Policy Committee (MPC) changes the underlying interest rates across the economy, tracker mortgage interest rates rise or fall correspondingly. Tracker rates are typically lower than fixed rates. Some tracker mortgages have no Early Repayment Charges, affording you the flexibility to make larger overpayments or even repay the mortgage in full without a penalty.
These give customers a period of time during which the mortgage rate is offered at a discount. For example this could be a two-year period with a lower introductory variable rate offered at a discount to the lender's Standard Variable Rate, and then reverts to the SVR at the end of the discount period.
Standard Variable Rate (SVR)
An SVR is set by each lender, and usually changes roughly in line with The Bank of England’s interest rate. An SVR usually has a higher interest rate than a discounted or fixed rate mortgage. However, SVRs tend to offer flexibility in that customers aren't locked into products and can switch to a more competitive one if and when it becomes available.
Some variable rate mortgages will have arrangement fees and other related fees. It’s always important to compare the true cost between products - taking into account fees, incentives, and monthly repayments over the initial period - for an overall comparison cost.