Variable rate mortgages

What is a variable rate mortgage?

With a variable rate mortgage, your monthly payment can go up or down depending on the terms of the mortgage. There are three main types of variable rate mortgages - tracker rate mortgages, discount rate mortgages, and the standard variable rate set by your lender.

How does a variable rate mortgage work?

  • Your monthly payments can vary, depending on the base rate it is tracking.
  • This differs from a fixed rate mortgage, where you know exactly what you will be paying each month.
  • While it might have a rate lower than a fixed rate to start with, it could go up if interest rates rise.
  • Tracker or discount mortgages have set terms but standard variable rates tend to be ongoing.
  • Usually, you can switch to a fixed rate without paying an early payment charge.

Types of variable rate mortgages

Standard variable rate mortgages

This is the basic interest rate the lender uses, and will vary depending on who your mortgage is with. If you're on an introductory fixed, discount or tracker mortgage rate, your mortgage will usually move on to the lender’s standard variable rate - which is invariably at a higher rate - when the term ends. However, there’s no easy way of knowing when the lender will choose to increase it.

Discounted variable rate mortgage

These rates are a percentage discount of the bank or building society’s standard variable rate (SVR) for a specific period of time, usually two or three years but sometimes longer - for example: Lender’s SVR is 4.5% - discount is 1% - Your first payment is 3.5%. They can change at any time at the lender’s discretion, as they are linked to their SVR. The rates can be low to start with but may well go up - and there’s no guarantee they will fall when interest rates do.

Tracker rate mortgage

These mortgage rates are a fixed percentage above (usually) the Bank of England base rate. They generally ‘track’ it for a period of between one and five years, but there are also ‘Lifetime’ tracker mortgages that have no fixed end date and in theory can run to the end of your mortgage. Find out more about tracker rate mortgages.

The type of mortgage you choose will make a difference to the amount that you repay every month, so you need to think it through carefully.

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