Variable-rate mortgages

Types of variable-rate mortgage

There are two types of variable-rate mortgage:

Tracker mortgages

Tracker mortgages track the Bank of England (BoE) base rate. If the BoE base rate increases by 1%, your mortgage interest rate will increase by 1%. If the BoE rate decreases, so does your mortgage rate.

Tracker deals usually apply for a set length of time, with two-year trackers being especially common. After the tracker deal ends, you’ll usually be moved onto your lender’s standard variable rate.

Tracker mortgages often have early repayment charges, which means you’ll have to pay if you want to get out of the deal and switch to another product before the tracker period ends.

It’s important to bear this in mind, because if interest rates increase you could end up unable to exit your deal, despite costs increasing.

If flexibility is important to you, look for a tracker mortgage with no, or low, early repayment charges.

Standard variable rate mortgages

Standard variable rates (SVRs) follow the bank’s own interest rate, rather than the BoE base rate. Usually lenders will change their SVR in line with the base rate, but they don’t have to.

Technically this means that, if you’re on an SVR, your interest rate could change at any time, at the whim of the lender.

You’ll usually be moved onto the lender’s SVR when your tracker-rate or fixed-rate mortgage deal ends, unless you arrange to remortgage instead. SVR mortgages don’t usually have any early repayment charges though, so you should be free to remortgage at any time without penalty.

Advantages of variable-rate mortgages

Because of the uncertain nature of variable-rate mortgages, you may find that tracker deals have lower interest rates and fees than fixed-rate deals of the same length.

However, sometimes the gap between fixed-rate and variable-rate mortgages is pretty narrow. According to Bank of England figures, the difference between the average SVR and the average two-year fixed-rate deal was around 2% in August 2021.^[2] When this is the case, anyone currently on an SVR who has delayed switching should think about doing so while rates remain low.

Another advantage of variable-rate mortgages is that they sometimes have fewer restrictions on switching than fixed products. For instance, some will have low or no early repayment fees and may allow higher overpayments.

This isn’t always the case though, so if you’re choosing a tracker mortgage for more flexibility, make sure you check the terms and conditions before you commit. If you're unsure, a mortgage adviser can help you find the right product with the flexibility you need, for a fee.^[1]

Of course, most SVR mortgages won’t have early repayment charges, so you’ll be able to switch or overpay. However, if you’ve moved onto your lender’s SVR the rate may not be competitive – shop around to see if you could switch to a better deal.

With a tracker rate, if interest rates fall, your monthly payments will also fall. With the BoE’s base rate at 0.1%, some mortgagors will currently be paying hardly any interest at all.