What is a Variable Rate Mortgage?
When you apply for a mortgage or remortgage you need to choose which of the available interest rate products you would like.
There are broadly 2 types:
- interest rates which change (variable) and
- interest rates that stay the same (fixed).
A variable rate mortgage is a type of mortgage where the lender’s interest rate can move up or down. Compare this to a fixed interest rate mortgage where the rate is set for a period of time and is not affected by interest rate changes elsewhere.
How do variable rate mortgages work?
Variable rate mortgages are linked to the lender’s Standard Variable Rate (SVR).
The interest rate you pay will be set by your lender and won’t necessarily rise or fall in line with changes to the Bank of England Base Rate. As the interest rate is variable your repayments will change when the SVR changes.
Other types of variable rate mortgages
As well as the Standard Variable Rate (SVR) mortgage products there are 2 other types of variable interest rate:
- Tracker rate
- Discounted variable rate
Tracker mortgages will follow, or track, a Bank base rate rather than the SVR. This can be the Bank of England Base Rate (BEBR) or one of the major banks. As the BEBR changes your monthly repayments are recalculated.
With a discounted rate mortgage the interest rate you pay will be the lenders SVR less a discount percentage. EG. SVR minus 0.20% pa. These products generally last for a set period of time before reverting back to the SVR.
What is the SVR rate?
A standard variable rate (SVR) mortgage is what you will normally be transferred onto when a fixed, tracker or discount deal comes to an end. (if you do nothing!!)
Lender’s will set their own standard variable rate (SVR), and this is the default interest rate that you’ll be charged if you don’t change product or re-mortgage.
A lender can raise or lower its SVR at any time and, as a borrower, you have no control over these changes. Variable rates can be influenced by changes in the Bank of England’s base rate but don’t have to follow it exactly.
Can you make overpayments?
A mortgage overpayment is classed as any additional payment you make above your usual monthly payment. Overpayments can either be a single one-off amount or a regular overpayment made each month for example.
Every lender sets their own rules but many do now allow overpayments of upto 10% pa without incurring any early repayment charges.
If this is important to you then it’s wise to ask your broker to clarify what limits there may be for overpayments.
You will always be allowed to make an additional payment of any size towards your mortgage. However, this may incur charges so you should check beforehand.
What happens when the deal ends?
At the end of a discounted variable rate you will usually be moved onto the lender’s standard variable rate (SVR).
Your interest rate product will end on a specific date, check your paperwork to see when this is. Your existing mortgage company will write to you a few months before this date to offer you some new rates to choose from.
If you are already on the SVR and do not wish to change then there is nothing further to do.
Each time a special rate period ends you will need to decide what to do to avoid being overcharged. If you find this time consuming simply let your mortgage broker sort it out for you.
Mortgage Early Repayment Charges (ERCs)
Early Repayment Charges, or ERC’s, are exit fees that apply during the initial discounted rate product term.
You will have to pay ERC’s if you want to leave your current mortgage interest deal before the product end date, or make overpayments in excess of what is permitted.
The amount you will have to pay will depend on your mortgage lender, but it can be 2% and 5% of the total amount repaid.
Once you have moved over to your lender’s standard variable rate there are rarely any ERC’s to pay.
Fees
Some discounted variable rate deals can have an up-front fee. Some lenders will allow you to add this to the mortgage instead of paying it from your own money.
Although this seems very generous of them, be aware that you will be paying extra interest for ‘borrowing’ the product fee.
Before you apply for a mortgage you should be given a mortgage quote or KFI. This will show you the monthly mortgage repayments, fees, interest rate, ERC and APRC.
Mortgage Advice
Trying to compare different mortgage deals from different lenders can often be frustrating, and time-consuming.
By seeking the advice of an independent broker you can allow them to search the market for a deal that suits you. They will compare the costs and explain all of the fees to you, before you decide to go ahead.
We work with an award winning independent broker who can give our clients the best advice wherever they live in the UK. Just click the button below to get started.
FAQ
Frequently Asked Questions
How do I get the best deal?
By using an independent mortgage broker you will have access to thousands of different schemes and rates.
Are repayment mortgages variable or fixed?
Your repayment method is separate to the type of interest rate. So a fixed rate can be set up as repayment or interest only and vice versa for a variable/tracker rate.
Are variable rates popular?
Many people do prefer a variable interest rate. However, fixed rates are the most popular choice for over half of mortgage borrowers each year.
Does the SVR have exit fees?
Rarely. This is one of the big advantages and means you are not tied to the lender.
What is the Bank of England Base Rate?
This is the rate the Bank of England charges other banks when they borrow money. The base rate influences the interest rates that many lenders charge for mortgages, loans and other types of credit they offer people.
What is a discounted SVR mortgage?
The rate you pay will be the lender’s SVR less the agreed discount which reduces the monthly interest charges.
The rate you pay will fluctuate as it is linked to the SVR.
