Variable Rate Mortgages

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What is a Variable Rate Mortgage?

A variable rate mortgage is a mortgage which has fluctuating monthly repayments. There are several types including:

  • Standard Variable Rate (SVR) mortgage. The SVR is determined entirely by the lender in question. It may be influenced by the Bank of England Base rate but the lender can change their rate however and whenever they choose. See the next section for further details about SVRs.
  • Tracker mortgages which fluctuate in line with the Bank of England base rate and are typically set at a defined margin either above or below this interest rate. Our guide to tracker mortgages will give you all the details you need.
  • Discount mortgages which have an interest rate that is discounted at a certain level below a mortgage lender’s SVR, for a set period of time. Read our full guide for more information on this style of variable rate.
  • Capped mortgages are also usually based on the lender’s SVR but are capped so that your payable interest rate and, therefore, mortgage payments won’t go above a certain level. You can read more in our guide to capped mortgages.

variable rate mortgage

How does a Standard Variable Rate work?

The SVR is determined by your mortgage lender and can be increased or decreased at any time. Your monthly payments can therefore fluctuate up and down.

If the Bank of England increases their lending rate by 1% for example, a mortgage lender can choose to follow suit and increase their SVR by 1% (or by less/more than 1%), they can opt to do nothing at all and keep their rate the same, or they could even decrease the rate (although this is unlikely).

As mentioned, lenders can change their SVR at any time, not just when the Bank of England lending rate changes. However, the likelihood of a lender setting an extremely high variable rate is limited by competitive pressure, negative press and public scrutiny.

When taking out a discounted or variable rate mortgage or even a fixed rate mortgage, you will usually be automatically transferred to a the lender’s SVR after your introductory or offer period lapses. It is advised in most cases, that you try to negotiate a better mortgage rate at this point as is common for the SVR to be the lender’s least competitive deal. You can read our guide to remortgaging for more information on how to save money on your mortgage.

Advantages of Variable Rate Mortgages

  • When interest rates are low or reduce, you will benefit from lower monthly repayments.
  • Variable rate mortgages often have lower arrangement fees or a lower initial interest rate than a fixed rate to compensate for the additional risk involved.
  • There are generally no Early Repayment Charges for SVR mortgages which allows more flexibility to overpay, pay off the mortgage early, or to remortgage.

Disadvantages of Variable Rate Mortgages

  • When interest rates go up, your monthly repayments will almost certainly go up.
  • If interest rates rise significantly, you may be unable to keep up with your monthly repayments which puts you at risk of losing your property.

Final Considerations

This guide should have answered the question ‘What is a variable rate mortgage?’ but when considering whether a fixed rate or a variable rate mortgage is the best option for you, there is a lot to think about. Whereas, fixed rate mortgages give you peace of mind knowing that your monthly payments will stay the same, variable rate mortgages can offer some of the lowest rates on the market. 

Speak to one of our qualified advisers for for help with your decision and read our guide to different types of mortgages if you want to learn more about available options.

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