Variable rate mortgages

Types of variable rate mortgages

The best variable rate mortgage for you will depend on your individual circumstances and your appetite for risk, so it's a good idea to review this information and discuss at greater length with a mortgage expert, before making a final decision.

Standard variable rate mortgages

Every lender has a standard variable rate (SVR), which is their default interest rate and usually higher than other rates. When you take out any other type of mortgage deal, you'll automatically transfer onto your lender’s SVR once that deal comes to an end - usually after two, three, five or ten years, depending on the term you chose.

How do standard variable rate mortgages work?

Standard variable rates are set by the lender, who also decides when and how much to increase or decrease them by. Although every lender will be influenced by changes in the Bank of England’s base rate, SVR rates (and therefore also discount rates) are not directly linked to any external economic indicator. This makes it more difficult to predict when your mortgage repayments may rise or fall. 

When might an SVR mortgage be right for me?

SVRs are rarely the cheapest option, although in the current market, it is worth speaking to a broker about this. In some circumstances, however, staying on an SVR may be the best option. For example, if you’re unable to qualify for a remortgage at the current time, but the product transfers available with your existing lender won’t save you any money. They can also be helpful if you’re looking to move home within a short period, as you won’t need to consider ERCs.

Tracker mortgages

Tracker rates are the only type of variable rate mortgage where fluctuations in rate are not entirely in the hands of the lender. They follow what’s known as an external economic indicator - this is usually the Bank of England’s base rate.

Rate changes happen whenever the economic indicator that they are following (or tracking) rises or falls. This means that it can be easier to predict whether your rates may be due to increase or decrease than it is with other variable rate types, simply by keeping up to date with financial news and mortgage market patterns.

Tracker rate deals have a set length, and whilst it’s most common to opt for a two-five year term, some are available for the lifetime of the mortgage. Each lender prices their tracker rates at a percentage (of their choice) above the external indicator they are following. 

This percentage stays the same for the length of the deal, so your rate can only rise and fall based on that set percentage.

For example, a tracker rate set to the Bank of England base rate (currently 4.5%) plus 2%, would be charged at 6.5%. If the base rate was to rise to 5%, your rate would change to 7%, as the 2% charged by the lender remains the same.

Discount rate mortgages

Discount rate mortgages also have a variable interest rate, so they can rise or fall throughout the term of your deal. These changes are a little more difficult to predict, however, as rises and falls in the rates are in the hands of each individual lender. 

A discount rate is set at a percentage discount on the lender's SVR. The percentage of the discount won’t change throughout the length of the deal, but the lender can change the SVR attached to it at any time.

For example, if the lender’s SVR is 5% and a discount rate gives you 1% off, your interest rate would be 4%. If the SVR rises to 6%, however, you would keep your 1% discount, but the interest rate you'll pay would rise to 5%.

Again, these deals most commonly last for two to five years, but are available on a lifetime basis, if preferred.

Disadvantages of variable rate mortgages

The main disadvantage of variable rate mortgages is a bit more general, as they all share in their unpredictability. This means that no matter whether you have a tracker, discount, or SVR mortgage, your payments can go up or down at any time. 

Those on a strict budget may prefer to opt for a fixed-rate mortgage. Fixed-rate mortgage interest rates will not change at all for the length of the deal, so you’ll always know how much your repayments will be. 

SVR and discount rates also have the further disadvantage of being more difficult to predict than a tracker rate. Tracker rates are often the most suitable option for people looking for a variable rate, but wanting slightly more idea of when their rates may change. 

It’s also important to note that tracker rates and discount rates are deals that you are locked into for a specific period of time, unless you pay ERCs (early repayment charges) to leave them. This could be a disadvantage if your rates suddenly rose considerably and you were unable to pay the fees necessary to remortgage.