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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?

There are three main types:

  • Standard variable rate (SVR)-This is the lender’s default mortgage rate if you don’t remortgage. SVRs are set entirely at the lender’s discretion, are usually the most expensive deal available, and lenders choose when to increase or decrease them — they don’t have to follow the base rate at all. For example, if a lender’s SVR is 7% and your discount is 2 percentage points below SVR, you pay 5%. If the lender raises its SVR to 7.25%, your rate rises to 5.25%.
  • Discount rate mortgage- These are usually offered at a discount on the lender’s SVR, so the rate moves whenever the SVR does. 
  • Tracker mortgage- These follow the Bank of England base rate at a fixed margin set by the lender — the rate only changes if the base rate does. For example, if a lender sets a tracker at 1 percentage point above base rate, and the base rate is 3.75%, you pay 4.75%. If the base rate falls to 3.50%, your rate falls to 4.50%.

How a base rate change affects your tracker mortgage payments

As an illustration only, here’s how a change in your tracker rate could affect monthly repayments on a £200,000 repayment mortgage over a 25-year term, assuming a fixed margin of 1 percentage point above the base rate:

Base rate Your tracker rate (base + 1%) Monthly repayment
3.50%
4.50%
£1,112
3.75%
4.75%
£1,141
4.00%
5.00%
£1,169

What our mortgage expert says

"One of the biggest misconceptions about variable mortgages is that your rate changes every time the Bank of England moves its base rate. That isn’t necessarily how it works - depending on the type of variable mortgage you have, the lender may set the rate using its own criteria."

Ashlyn Trojnacki - Mortgage expert
Mortgage Expert Confused.com logo

Can I pay off my variable rate mortgage early?

Yes! Standard Variable Rate (SVR) mortgages allow you to repay your mortgage early, either in full or through overpayments, without incurring fees, giving you more flexibility to reduce your debt faster. However, if you have a tracker or discount mortgage, these usually come with an introductory period. Remortgaging or paying off your mortgage before this period ends may result in early repayment charges (ERCs), so it’s important to check your lender’s terms before making extra payments.

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 early repayment charges on most variable deals - unlike many fixed-rate mortgages, most tracker, SVR and discount mortgages don’t charge a penalty if you remortgage or overpay, giving you more flexibility to switch if a better deal comes along.
  • 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.
  • Budgeting is harder - because your rate can move at short notice, your monthly payment isn’t fixed, which can make it harder to budget than with a fixed-rate deal — worth weighing against your own tolerance for that uncertainty.

Is now a good time for a variable rate mortgage?

Whether a variable rate suits you depends on your own circumstances: how much a rate rise would affect your budget, how long you plan to stay in the property, and whether you’d prefer the certainty of a fixed monthly payment over the chance of paying less if rates fall. A mortgage broker, such as Mojo, can look at your specific situation and compare fixed and variable deals side by side.

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.

What’s the difference between a tracker and a discount mortgage?

A tracker mortgage follows the Bank of England base rate at a fixed margin, so it only changes when the base rate does. A discount mortgage is a discount on the lender’s own SVR, so it changes whenever the lender changes its SVR - which can happen independently of the base rate. See our tracker mortgages guide for a fuller comparison.

How do I switch from a variable rate to a fixed rate mortgage?

You can usually remortgage onto a fixed rate at any time, either with your current lender (a product transfer) or by switching lenders. Most variable deals don’t charge an early repayment fee for doing this, though it’s worth checking your specific mortgage terms. See our fixed rate mortgages guide, or compare deals with Mojo, to see current options.

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Learn about different mortgage types

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Mortgages

Are a type of loan used to buy a property. The mortgage is secured against the value of the property.

First time buyers mortgages icon

First-time buyer

Are designed to help give you that first step on the housing ladder.

Remortgage icon

Remortgage

Are for when your current mortgage deal comes to an end.

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Interest-only mortgages

Are where you only pay back the interest each month. When your mortgage term comes to an end, you still owe exactly what you borrowed at the start.

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Buy-to-let Mortgages

Aren't that different from a regular mortgage. But there are some important differences.

YOU SHOULD THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME/PROPERTY. YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. 

The Financial Conduct Authority does not regulate mortgages for commercial or investment buy-to-let properties. 

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