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Variable-rate mortgages

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What is a variable rate mortgage?

A variable rate mortgage doesn’t have a set interest rate, so the rate of interest you pay and your repayments can change at any time.

If you’re on a set budget or are fairly cautious, a fixed rate mortgage may be more suitable, as the rate can’t change during a fixed period.

Lenders offer lower initial interest rates for some types of variable rate deals, but they can change quickly, even in an introductory period.

What are the different types of variable rate mortgages?

The best variable rate mortgage for you will depend on your circumstances and needs.

  • Standard variable rate (SVR)- This is the lender's default mortgage rate if you don’t remortgage. SVRs are usually the most expensive deal available and lenders choose when to increase or decrease them - base rate changes can influence their decision, but won’t necessarily.
  • Discount rate mortgage- These mortgages are usually offered at a discount on the lender’s SVR - it changes when the SVR does. For example, if the lender has an SVR of 5% and their discount rate is 2% below SVR, you pay 3%. If the SVR is raised to 6% you pay 4% - so the percentage it can increase or decrease by is fixed, but not the amount you pay. 
  • Tracker mortgage- This is based on an external financial indicator - usually the Bank of England (BoE) base rate. This makes it slightly easier to predict when they rise or fall than other variable rate mortgages. The rate is typically set at a percentage above the base rate. The lender decides on that percentage, but the rate only changes if the base rate does. For example, if a lender sets a tracker at 2% above base rate, and the base rate is 4%, you pay 6%. If the base rate falls to 3.5%, your rate falls to 5.5%.

What are the advantages and disadvantages of a variable rate mortgage?

  • Opportunity to save money - Your rate is not fixed, so it can fall at any time, giving you the opportunity to save money.
  • Lower initial rates - Tracker and discount rates usually start with lower cost introductory periods - so a 2 year tracker-rate is typically lower than a 2 year fixed rate, for example.
  • Less chance of ERCs - There are no ERCs on an SVR mortgage as it has no set period - so you can remortgage whenever you choose. This may be a good option if you’re expecting a change in the market or plan to move soon. Discount and tracker rates are more likely to include ERCs, especially on introductory deals.
  • Caps can reduce your risk - If your tracker or discount rate has a cap (or ceiling), your variable rate will not rise beyond this point. For example, if you have a tracker set at 1% above the base rate, but with a cap of 5%, your mortgage wouldn’t rise if the base rate rose above 4%.
  • No certainty of rates - Whatever type of variable rate mortgage you choose, there's always a chance the rate could rise. This means your mortgage repayments can go up at any time, potentially making them unaffordable.
  • Not always cheaper - Although tracker and discount rates can be cheaper to begin with, SVR rates are not usually lower than fixed-rate deals, even initially. This is because you’re paying extra for the flexibility to leave anytime and make overpayments.
  • You may need to pay ERCs - If you’re on an introductory tracker or discount variable rate, there are often ERCs if you want to remortgage before the deal ends. Only an SVR guarantees that you won't have to pay ERCs.
  • Collars can minimise your savings - When you compare variable rate mortgages be sure to calculate the impact of any collars - most commonly found on trackers. As your rate can never fall below the collar, they may reduce the amount you save if the base rate falls.

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Need more help?

What is the difference between variable rates and fixed rates?

Variable rate mortgages have interest rates that can change at any time. Fixed-rate mortgages have a set interest rate that cannot change for a fixed period of time.

Can I pay off my variable rate mortgage early?

SVR mortgages allow you to repay your mortgage early, either by remortgaging or through overpayment, without fees.

A tracker or discount mortgage usually has ERCs if they have a set length. This is known as the introductory period, and remortgaging before its end date often results in charges.

When is it better to get a fixed rate mortgage instead?

Usually it’s best to get a fixed rate mortgage if you’re on a fixed budget or prefer knowing your exact outgoings.

If you have low expendable income, your repayments may become too expensive if your variable rate rises by just a few percent. 

Some people find it worthwhile paying a slightly higher fixed-rate, compared to a lower variable rate that could rise at any time.

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Page last reviewed: 27 September 2023

Reviewed by: Claire Flynn


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