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Variable-rate mortgages – whether a standard variable rate (SVR) or a tracker product – are mortgages that don’t have a fixed interest rate, so the amount of your monthly repayments can change at any time.
If you’re risk averse and like to know exactly what your monthly payments are for a set period of time, you’re likely to be more comfortable with a fixed-rate mortgage.
There are two types of variable-rate mortgage:
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 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.
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.
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 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.
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.
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. 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.
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.
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.
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.
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.