What is a variable rate mortgage?

Do you have a flexible budget? Would you like to save on mortgage fees and remortgage costs? Do you want to benefit from decreasing interest rates without having to remortgage?

If so, a variable rate mortgage might be the right mortgage for you.

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How does a variable rate mortgage work?

With a variable mortgage, the interest you are charged each month is based on either the Bank of England's fluctuating interest rate (commonly referred to as the base rate) or your lender's standard variable rate (SVR). These rates can change from month to month, therefore, your repayments will be higher when interest rates increase, and lower when interest rates decrease.

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What types of variable rate mortgages are there?

There are variable mortgages based on your lender's standard variable rate or on the Bank of England's base rate. Both types have discount options for a specified period.

• Standard variable rate mortgage: Every lender has a standard variable rate (SVR) that is set above the base rate (usually 2% above the base rate). Standard variable rate mortgages follow the base rate, but a lender doesn't have to change the SVR when the base rate changes. Therefore, the lender can decrease or increase your repayments at any time.
• With a discounted variable rate mortgage you get a discount off the SVR for a certain amount of time (typically the first two or three years of your mortgage). Once the discount period is over, your mortgage reverts to the SVR for the remainder of your mortgage. While the discount may appear attractive, keep in mind that your lender might charge you a higher SVR for the remainder of your repayments, so make sure you choose the deal that will save you the most money in the long run.
• Base rate tracker mortgage: The base rate mortgage, referred to as a tracker mortgage, works similarly to standard variable mortgages, except your interest rate always changes when the base rate changes. Your lender will charge you a fixed percentage over the base rate. Note, however, that this does not mean your repayment amount will automatically change. Some lenders will keep your repayment the same if the rate goes down, resulting in you effectively overpaying your mortgage until you request otherwise.

You can also get discount tracker mortgages, but just like the discount standard variable rate mortgage, your lender can charge you a higher percentage over the base rate once the discount period is over. You may benefit more from a lifetime tracker mortgage in the long run.

For more information, read the article on base rate tracker mortgages.

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Are there disadvantages in getting a variable rate mortgage?

A mortgage with a variable rate is a bit of a gamble - it's basically you against the market. You could end up saving thousands of pounds if interest rates fall, but on the other hand you may have to pay a lot more if interest rates increase. If you aren't the gambling type and you want to know how much money you will be paying every month, you should consider a fixed rate. Unfortunately it is impossible to tell when and why the base rate will change, but you could save a great deal of money with a variable rate if interest rates drop.

If you aren't sure whether to get a variable rate or a fixed rate, you could try to find a variable rate mortgage without any early repayment charges (ERCs). Therefore, you can be on a variable rate mortgage and see how the base rate is doing. If interest rates start to increase, you can change to a fixed rate without suffering any charges for switching mortgages.

In order to determine what kind of mortgage best suits you and your lifestyle, you should talk to a professional mortgage adviser. An adviser can go through your finances with you to make sure you could cover all your repayments in case interest rates increase. Once you determine which type of mortgage is right for you, an adviser can search through thousands of deals and find the best mortgage for you.

[fixed vs variable mortgage chart]

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What else do I need to consider before getting a variable rate mortgage?

You need to plan for the future. Since your repayments are constantly changing, you need to plan ahead in case there is a drastic increase in interest rates. You need to have a flexible budget that can support the ups and downs of a variable mortgage loan.

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What's so great about a variable rate mortgage?

Mortgages on variable rates tend to have smaller application fees and no tie-in periods (unless you are on a discount). Since early redemption charges are low or non-existent, you can switch mortgages or pay off your mortgage early without have to spend a great deal of money. Variable rate mortgages tend to have flexible features which can help you feel more in control of your loan and help you pay off your mortgage faster so that you can save thousands of pounds.

There is also little need to remortgage with a variable rate. This will save you the hassle and expense of constantly having to remortgage. If you have a 25 year mortgage and you have to remortgage every 2 years, you could end up spending a combined total of £13,000 in fees. A variable rate mortgage can save you this huge cost.

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What are other rate options?

You may also want to consider fixed rate mortgages (for a more secure repayment plan), tracker mortgages (a type of variable mortgage), capped mortgages (which incorporate features of both fixed and variable rate mortgages), and discount mortgages (for lower repayments in the early stages of your mortgage term).

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How to get a variable rate mortgage in the UK

Just fill in this short form and a mortgage adviser will contact you to answer all of your questions, give you variable rate mortgage advice, and get you on your way to buying your home.