What exactly is a variable–rate mortgage? How do they work? What are the different types? And what are the pros and cons? Variable-rate mortgages; come, on what do you know?
If the answer is, ‘not a lot’, you’re not alone. The industry tends to over-complicate things when it comes to mortgages, so it’s no wonder things can get confusing.
This is why at More Than Money we like to keep things as simple as possible – no jargon, just easy-to-follow information that is accessible for everyone!
What Is A Variable-Rate Mortgage?
A mortgage is a loan you take out in order to buy a property or piece of land.
As with any loan, you have to pay interest.
A variable-rate mortgage is one where the amount you have to pay each month can go up and down as the interest rate goes up and down.
There are 3 main categories of variable-rate mortgage:
- Standard variable rates (SVRs)
- Tracker rates
- Discounted rates
How Does A Variable-Rate Mortgage Work?
Because your interest rate can go up and down, your monthly mortgage repayments are going to vary.
The rate that you are on will be set by your lender, and won’t necessarily rise or fall in line with the Bank of England base rate – unless it’s a tracker mortgage – but more on those later.
What Is A Standard Variable-Rate Mortgage? (SVR)
SVR stands for Standard Variable Rate.
This is the mortgage rate that your lender will normally put you on once your initial mortgage deal has finished.
It is the lender who decides when the rate moves up and down, and it is normally more expensive than other mortgage rates.
If you are moved onto an SVR mortgage when your introductory mortgage deal ends, you will be able to remortgage without having to pay any early repayment charges.
What is A Discounted Rate Mortgage?
This type of variable-rate mortgage offers you a discount from the SVR for a set period of time.
As awesome as this sounds, a word of caution: the rate that you pay is decided by your lender, and because it’s a type of variable-rate mortgage, that amount can move up and down.
This means you might not know exactly how much is going to be coming out of your bank account each month!
Tracker Rate Mortgage
A tracker rate mortgage tracks the movement of the Bank of England base rate – hence the name – plus a set percentage.
Your monthly mortgage repayments will go up and down as the interest rates do, and generally change the month after the base rate has.
However, as you can probably guess, there is a limit to how low your payments will go – regardless of how low the Bank of England base rate falls.
This is known as an ‘interest rate collar’ or ‘floor’, and it is a set amount that your rate won’t go below.
But, should you choose a variable-rate mortgage over a fixed-rate, interest-only, or other type of mortgage?
Of course, I would always advise that you speak to a qualified mortgage advisor, like the experts here at More Than Money before you make any decisions, but what are the advantages and disadvantages of choosing a variable-rate mortgage?
What Is The Main Advantage of A Variable-Rate Mortgage?
The main advantage of a variable-rate mortgage is that most variable-rate deals let you make overpayments.
That might not sound great at first, but bear in mind it will allow you to pay your mortgage off earlier and pay less interest in total overall.
But what about a tracker mortgage, which will most likely charge you a penalty for paying off your mortgage early? How is that going to save you money?
Well, don’t forget that with a tracker mortgage, the amount you pay will move in line with the Bank of England base rate, so you’ll pay less interest when rates are falling – hooray!
Of course, this does mean that you will pay more if interest rates rise.
What Is The Main Disadvantage Of A Variable-Rate Mortgage?
Opting for a variable-rate mortgage can make it hard to budget for your monthly mortgage repayments because they can change over time.
They don’t offer the same security as a fixed-rate mortgage, where you’ll know for a fact that your mortgage repayments will stay the same for a set amount of time.
If you want to find the best mortgage deal to suit your needs, whether it be a variable-rate mortgage or not, pop in for a cuppa and a chat wit the team at More Than Money. We specialise in finding you the best deal, and have access to all the lenders – including those you won’t find on online price comparison sites.