Variable rate mortgages explained

Quick answer: A variable rate mortgage is a mortgage with an interest rate that can go up or down. The monthly mortgage payments rise and fall with the changing rate. Three types of variable mortgage rates are discounted, tracker and standard variable rate (SVR).

A variable mortgage rate is a type of interest rate. It can change while you have it, meaning your monthly mortgage payments can too. Variable rates are often compared to fixed rates, which do not change. It’s worth understanding the different types of variable mortgage rates — like discounted, tracker and SVR. This can help you choose the right mortgage, plan for rate changes and decide what to do when a fixed rate ends.

Our guide explains what a variable mortgage rate is, the different types and what to expect. You’ll come away with an idea of the pros and cons and whether a variable mortgage rate could work for you.

Want to see current variable mortgage rates? Compare mortgages with Experian. See top offers from over 100 trusted lenders. Comparing is free and will not harm your credit score. We’re a credit broker, not a lender.

What is a variable rate mortgage?

A variable rate mortgage is a way to borrow for a home with an interest rate that can go up or down. The interest rate affects how much you pay each month and overall. If your rate goes up, you can expect higher payments. If it goes down, you’re in luck — your mortgage should get cheaper. Some main types of variable rate mortgages are tracker rate, discounted rate, and standard variable rate (SVR).

How does a variable rate mortgage work?

Here’s how a variable rate mortgage works and what it can mean for your payments.

• Your rate can rise or fall. By how much and when depends on the terms of your mortgage, the mortgage market and your lender’s decisions.
• Variable rates are different from fixed rates. A fixed mortgage rate does not change, so you know what you’ll pay each month.
• Some mortgages start with a discounted variable rate. This could save you money — but it can go up if the lender increases their SVR, and there’s usually an end date.
• Some variable rates ‘track’ another rate. Tracker rates are set at a percentage above an independently set rate (often the Bank of England base rate).
• Discounted and tracker rates usually end. They often run for a few years or longer, whereas standard variable rates (SVRs) tend to be ongoing.
• There’s often no early repayment charge. You can overpay or switch mortgages without a penalty fee, except on some discounted or tracker rates. Fixed rate mortgages have an early repayment charge — though lenders may let you overpay by 10% a year without penalty.

Types of variable rate mortgages

Three main types of variable rate mortgages are discounted, tracker and standard variable rate (SVR). Each type can go up or down depending on the terms of your mortgage. Learn about them below to help you choose the right variable rate mortgage for you.

Standard variable rate mortgage

A standard variable rate mortgage (SVR) is a mortgage with the lender’s basic rate. Each lender sets their own standard variable rate, and it’s almost always higher than their other rates. MoneyHelper says some SVRs are up to 5% higher than the Bank of England base rate, making them a costly option.

Lenders put you on their standard variable rate when your discounted, tracker or fixed rate ends. So how does an SVR work? It’s ongoing and your lender can change it within the terms of your mortgage. Standard variable rates almost always go up if the Bank of England base rate rises. If the base rate goes down, lenders usually pass the savings on to you, although they do not have to.

Discounted variable mortgage

It sounds cheap, but what exactly is a discounted variable mortgage? Simply put, it’s a mortgage that gives you a discount on the lender’s more expensive standard variable rate (SVR). It runs for a set period — usually two or three years, but sometimes longer. For example, if the lender’s SVR is 4.5% and you get a 1% discount, your first interest payment is 3.5%.

If you’d rather not be locked into a fixed rate, a discounted variable rate mortgage could be another way to save on interest. But just so you know, your lender can increase your discounted variable rate as it’s linked to their SVR. They may lower it if the base rate drops, but they do not have to.

Tracker rate mortgage

A tracker mortgage interest rate is a type of variable rate, but there are different rules about how it can change. A tracker rate is set at a fixed percentage above an independently set rate — usually the Bank of England base rate. It moves with this rate, following its ups and downs. Some tracker mortgage interest rates have a ‘collar’ or ‘floor’, meaning they cannot go below a certain point.

Tracker mortgage interest rates often run for one to five years. But there are also ‘lifetime’ tracker mortgages that have no fixed end date — in theory, these can run to the end of your mortgage. If your tracker rate ends, you’ll be put on the lender’s SVR which is usually higher.

What are the pros and cons of a variable rate mortgage?

The pros and cons of a variable rate mortgage depend on what you need from your mortgage and your comfort with risk. If you want flexibility and the chance to benefit from rate drops, a variable rate mortgage may suit you. If you need more predictability than flexibility, it could be worth looking at a fixed rate mortgage instead.

Here’s a quick summary of some pros and cons of a variable rate mortgage.

What’s the best variable rate mortgage for me?

We’ve compared the different types below to help you find your best variable rate mortgage. Want to see real offers? Search mortgages with Experian to see top offers from over 100 lenders — it’s free and will not harm your score. Just remember, we’re a credit broker, not a lender.

Discounted variable mortgage

• You’re looking for a cheaper mortgage without being locked into a fixed rate.
• You have a plan to repay some of your mortgage early and want to avoid an early repayment charge. Just make sure that the discounted variable mortgage you’re looking at doesn’t have the early repayment fee.

Tracker variable mortgage

• You think mortgage rates are going to fall soon.
• You want your rate to follow the official base rate, not the lender’s changes to their SVR.

Standard variable rate mortgage (SVR)

• You’re already on an SVR and cannot get approved for a better mortgage.
• You’ll move or pay off your mortgage soon, and switching is more hassle than it’s worth.
• You need more flexibility than a tracker or discounted rate mortgage can give you.

No matter which variable mortgage rate you choose, there’s always a risk your payments will go up. If that does not feel right — or you cannot afford a rate rise — you could look into a fixed rate mortgage for more predictable payments.

How to compare variable rate mortgages

Comparing variable rate mortgages is a smart move — especially if you look beyond just the advertised rate. A low interest rate may be attractive, but make sure the other details are right too:

• Mortgage type. Finding the right mortgage goes beyond looking at the rate. There are many types of mortgages designed for different buyers, like home movers, first-time buyers, landlords or people over 50. Other options can include interest-only and ‘bad’ credit mortgages.
• How the rate can change. Compare the different variable rate mortgage types, as well as the small print. When can lenders change your rate? Are there rate ‘floors’, or lower limits?
• When the rate ends. Consider how rates might change over the period. Is there enough flexibility or too much risk?
• Early repayment charges. Is there a chance you’ll want to overpay or switch your mortgage before the discounted or tracker rate ends? If so, check if there’s a penalty fee.
• Affordability. Work out the mortgage payments at the current rate, but also at a higher rate to see if you could afford a rate rise.
• Overall cost. Your mortgage rate, amount and term affect the overall cost. As with the monthly payments, it’s worth doing at least a few calculations based on possible rate changes.

Want to see real offers? Compare mortgages with Experian to see your best offers all in one place. It only takes a minute — just tell us what you’re looking for and let us do the rest. We search offers from over 100 trusted lenders to make your choice easier. Comparing is free and will not affect your credit score.

We’re a credit broker, not a lender.

FAQs

Is a tracker mortgage the same as a variable mortgage?

A tracker mortgage is one type of variable mortgage. This means it can go up or down depending on the terms of your agreement. But tracker rates are different from other types of variable mortgage rates, because they’re set at a fixed percentage above an independently set rate (like the Bank of England base rate).

Should I get a tracker or fixed mortgage?

Whether you should get a tracker or fixed mortgage depends on your needs. Fixed mortgages tend to be more predictable but less flexible. There’s an early repayment charge if you close a mortgage before the fixed rate ends — whereas tracker rates are less likely to have this charge. A tracker rate may be the right choice if you think rates will go down. However, rates are difficult to predict and may go up as well as down.

What’s the difference between fixed and discount mortgages?

One main difference between a fixed and discounted mortgage is that a fixed mortgage tends to be more predictable and less flexible. Both a fixed and discounted mortgage have a special rate that lasts for a set period, like one, two or five years. A fixed rate does not change — it usually starts lower than the SVR, but that can change if the SVR drops. A discounted rate can go up or down as it’s based on the lender’s standard variable rate (SVR) — for example, it might be 1% below it.