Variable rate mortgage and how do they work?

A variable rate mortgage is a type of mortgage in which your interest rate, and in turn your monthly repayments, can go up or down. Variable rate deals fall into 3 main categories – standard variable rates (SVRs), tracker rates and discounted rates.

Lisa Parker
May 22, 2023

How does a variable rate mortgage work?

With a variable rate mortgage, your interest rate can go up and down over time, which means your monthly payments can vary. The variable rate you are on will be set by your lender and won’t necessarily always rise or fall in line with changes to the Bank of England base rate, unless you’ve chosen a tracker mortgage. If you’re on your lender’s standard variable rate (SVR), you’ll typically be free to remortgage to a different deal without having to pay any Early Repayment Charges (ERCs).

Different types of variable rate

There are three main types of variable mortgage available: standard variable rate (SVR), discounted rate, and tracker.

Standard variable rate mortgage (SVR)

The standard variable rate is the mortgage rate your lender will usually move you onto once any introductory deal has finished.

Your lender will decide when the rate moves up or down. It is typically more expensive than other mortgage rates, so if you are moved onto an SVR when your deal ends, you may want to look into switching to a new deal.

Discounted rate mortgage

A discounted rate mortgage typically offers a discount from the standard variable rate for a set period. So, for example, the discount might be 1.75% off the standard variable rate. If the standard variable rate is, say, 4.5%, this means your payable rate would be 2.75% once the discount is applied.

The rate you pay will be determined by your lender and can move up and down, so you may not know the exact figure coming out of your account every month.

Tracker rate mortgage

A tracker mortgage, as the name suggests, tracks the movements of another interest rate, usually the Bank of England base rate, plus a set percentage.

This means your monthly repayments will move up and down in line with changes to interest rates. Tracker mortgage rates generally change the month after the base rate has moved. Some tracker deals have a ‘floor’, known as an interest rate collar, which the rate won’t go below, even if the Bank of England base rate falls below this level. Find out more about how tracker mortgages work in our guide ‘What is a tracker mortgage?

Advantages of variable rate mortgages

Most variable rate deals typically allow over-payments, which can help you pay off your mortgage early and pay less interest overall.

If you’ve chosen a tracker deal, which will typically have a penalty if you redeem your mortgage early, your payments will always move in line with changes in the Bank of England base rate. This means you’ll pay less when interest rates are falling (but more when they are rising).

Disadvantages of variable rate mortgages

One of the biggest disadvantages of variable rate mortgages is that your payments can change over time, making it harder to budget.

If you want peace of mind that your payments will remain the same for a set period of time, you may prefer to the security of a fixed rate mortgage.

Contact an expert at L&C today to help find the right deal for you.

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