Securing a mortgage is likely to be the biggest financial commitment that you will ever make and with so many different types, rates and deals available it can be overwhelming trying to decipher what it all means.
Variable rate mortgages can be beneficial in the right circumstances, with the potential for monthly payments to go up or down – depending on the terms of the mortgage. Whether or not this type of mortgage is best suited to your needs can come down to whether you are comfortable with what a variable rate mortgage entails and if you are financially stable enough to manage if payments increase.
How Does A Variable Rate Mortgage Work?
Variable rate mortgages involve a fluctuating interest rate that moves up and down in line with wider interest rates, meaning that your monthly payments go up and down over time. This ‘variable’ rate will remain for the duration of your mortgage period and will require some forethought into things such as savings. It is always advisable with this type of mortgage to set aside some funds when monthly payments are lower, to cover you in the event that interest rates rise, and your monthly payments increase.
This type of mortgage may not be for everyone and does not provide the certainty of the same repayment amount each month. However, there are some great deals available on variable rate mortgages and if the interest rates go down then the subsequent payments can reduce which makes this a great option for homeowners with a bit more flexibility in their monthly budget.
The Three Types Of Variable Rate Mortgages
There are three main types of variable rate mortgages – tracker, standard variable rate (SVR) and discounted rate mortgages.
These types of mortgages are linked to another interest rate, typically the Bank of England base rate and move in line with it, tracking it up and down. This means that for example, if the Bank of England puts the base rate up by 0.25%, your mortgage rate will rise by the same amount.
Some tracker mortgage deals come with a ‘floor’ also referred to as an ‘interest rate collar’ which the rate is guaranteed to not go below, even if the bank of England base rates falls lower than that level.
Discounted Rate Mortgages
Discount Rate Mortgages are similar to tracker mortgages except they are discounted against the lender’s Standard Variable Rate for an agreed period. This means that for example if the discount given is 1% and the lenders SVR is at 4.5% then the rate payable would be 3.5%. Lenders can choose to raise their SVR at any time if they wish, but most only tend to do so if the bank of England rate falls or rises.
These types of mortgages are usually offered for a set period of time, typically lasting for two, three or five years. There is a slightly greater risk and uncertainty attached to a discount mortgage, so Trackers tend to be more popular with people wanting a variable mortgage.
Standard Variable Rate Mortgages
The interest on these are set by the lender, rather than the Bank of England’s Base rate. They can be increased or decreased by the lender at any time during the mortgage term which can make them better suited to those that are more financially secure and able to manage with fluctuating interest rates. However, they do tend to offer a degree of flexibility that other types do not, such as being allowed to overpay or leave the agreement without incurring penalties.
A standard variable rate is what your lender will usually move you onto once your original or introductory deal has finished. They are usually more expensive then most so if your current deal plan come to an end and you have been moved onto an SVR then it could be worth having a look at some variable rate mortgage deals.
Which Mortgage Product Is Right For Me?
It can be overwhelming trying to process and understand the various types of mortgages available whilst also having to take into account what suits your personal circumstances, and which is the best deal or most competitive rate.
There are no shortcuts to making this important financial decision and it is only something that should be done after speaking to a professional mortgage expert who can help you to fully understand the advantages and disadvantages of each product before taking the next step.
If you would like impartial, unbiased and honest advice from professional, independent and experienced mortgage specialists then Bower are here to help! Simply get in touch to speak to one of our friendly, knowledgeable experts and discover how we can help find the right mortgage for you.
What is a variable rate mortgage?
Variable rate mortgages fluctuate up and down in line with a lenders interest rate or the Bank of England’s base rate. This means that unlike fixed rate mortgages where you pay the same amount each month, your monthly repayments will change and sometimes you can end up paying more or less than expected.
These types of mortgages are typically better suited to homeowners that are more financially stable and who are able to save up or could manage times where payments are higher. However, they can be worth the gamble if the rates remain low as you could end up paying less than expected.
What are the different types of variable rate mortgage?
There are 3 main types of variable rate mortgages – tracker, discounted rate and standard variable rate (SVR).
Tracker Mortgages – these follow a particular interest rate (usually the bank of England’s base rate) and are usually fixed to a set percentage above it as determined by the lender. If the tracked interest rate goes up then so does your interest rate and in turn, your monthly repayments, same as if they fall, then so does the amount you pay.
Discounted Rate Mortgages – similar to tracker mortgages, this type provides a discount on the lenders SVR over a set period of time. This means that the monthly payments required can rise and fall and lenders can decide to raise their SVR if they wish.
Standard Variable Rate Mortgages (SVR) – Technically an SVR mortgage isn’t something you would opt for or choose; it is what you typically end up with once your original mortgage deal period ends. It is a good idea to secure a new mortgage deal as soon as possible rather than let yours expire as SVR mortgages can be expensive.
What are the pros and cons of variable rate mortgages?
Here are some of the advantages and disadvantages of variable rate mortgages;
⦁ They can provide much more flexibility than fixed rate mortgages.
⦁ Unlike other types of mortgages, you won’t incur penalties for switching, increasing monthly payments or paying off your mortgage early.
⦁ If the interest rates are low then you can end up paying a much lower monthly rate then on other mortgages.
⦁ They tend to come with special, short term introductory rates.
⦁ The monthly payments can vary which means that you don’t have the predictability or certainty of knowing how much you have to pay.
⦁ Whilst the rates may be lower to begin with, they can go up if interest rates rise.
If the monthly mortgage repayments rise, then you must have the financial means to be able to pay them.
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. Some buy to let mortgages are not regulated by the Financial Conduct Authority.
Bower Mortgages provides impartial whole of market advice with an award winning customer service experience. There will be a fee for mortgage advice. The precise amount will depend upon your circumstances but a typical fee will be £595 on completion of the mortgage.
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