Variable-rate mortgages

Compare variable-rate mortgages with our provider Koodoo.[1]

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What is a variable-rate mortgage?

A variable-rate mortgage is a type of home loan that doesn't have a fixed interest rate, so the amount of your monthly repayments can change at any time.

Because your monthly payments are not for a set period of time, if interest rates rise or fall then your monthly payments will rise or fall as well.

Borrowers who think that interest rates will go down might prefer a variable rate mortgage, because when rates are falling your interest rates decrease along with the market rates. It’s less suitable if you are risk averse and like to know exactly what your monthly payments are for a set period of time.

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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.

Variable-rate mortgage features

Although variable-rate mortgages will be either a tracker or an SVR, your choices don't end here. There are some other features and sub-types of variable mortgages to be aware of.

Discount variable-rate mortgages

These offer a discount against the lender’s standard variable-rate mortgage and track against it.

So if the lender’s SVR is 4% and the mortgage offers a 2% discount, your interest rate will be 2%. But if the SVR increases to 5%, the rate you pay will be 3%.

Lifetime tracker mortgages

Lifetime trackers follow the BoE base rate like any other tracker mortgage, but they last for the entire duration of the mortgage.

They often have no early repayment charges, or early repayment charges may only apply for the first few years.

Mortgage collars and mortgage caps

Some variable-rate mortgages have collars and/or caps that limit how much the interest rate can change.

Mortgage collars protect the lender from the interest rate dropping too low. The collar is a minimum rate, below which the interest rate cannot fall.

Mortgage caps protect the borrower from the interest rate going too high. A maximum interest rate is set, above which the rate you pay cannot rise.

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.

Disadvantages of variable-rate mortgages

The main disadvantage of a variable-rate mortgage is the uncertainty – if interest rates rise, your monthly payments will increase.

This could be particularly difficult if you’re locked into a tracker with early repayment charges. You could find that your repayments become unaffordable, but switching products is also very costly.

Before locking into a variable-rate mortgage - whether a discount or tracker product - you need to carefully consider how an interest rate increase will affect you.

For instance, if you’ve got a 25-year mortgage for £256,000 with a 2% variable interest rate, a rate increase of just 1% will add about £213 to your monthly payments.[3]

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[1]For online mortgage comparison and advice introduces customers to Koodoo which is the trading name of Mortgage Power Limited who are authorised and regulated by the Financial Conduct Authority (FRN 845978).’s relationship with Koodoo is limited to that of a business partnership, no common ownership or control exists between us. Please note, we cannot be held responsible for the content of external websites and by using the links stated to access these separate websites you will be subject to the terms of use applying to those sites.

[2]Bank of England average SVR was 3.26% and the 2-year fixed rate (for 75% loan-to-value mortgages) was 1.24% in August 2021.

[3]The average UK house price in July 2021 was £256,000. Monthly interest for a 25-year mortgage with a 2% variable interest rate was £426.66, compared to £640 for a 3% interest rate, meaning a 1% difference of £213.34.