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As the name suggests, variable rate mortgages have interest rates that go up and down, which means that your monthly repayments can change from month to month as the rate moves. Find out more about variable mortgages in our guide and discover whether a variable mortgage rate is suitable for you.

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What is a variable rate mortgage?

Variable rate mortgages, as the name suggests, have interest rates that are variable. They can move up or down and usually do so in line with the UK economy and the Bank of England’s base interest rate (currently just 0.25%). There are 3 main types of variable rate mortgage: standard variable rate (SVR), tracker and discount-rate.

What is a standard variable rate mortgage?

A SVR is the type of mortgage that you will generally find yourself on when your mortgage deal comes to an end, if you don’t opt to remortgage straight away. In most circumstances, going on to a standard variable rate is a situation you should try to avoid, as rates tend to be higher than the rate you will pay on other types of mortgage deals.

The standard variable rate often moves up and down in line with the Bank of England’s base rate, although there is no guarantee of this movement. In March 2020, the Bank of England dropped the base rate from 0.75% to 0.10%, however, not all lenders have passed the full 0.65% cut on to their customers.

If your mortgage deal expires and you go on to your lender’s SVR, it could easily push up your repayments by several hundreds of pounds per month. That’s why it’s a good idea to start shopping around for a new mortgage about three months before your existing deal is due to end.

What are the benefits of an SVR mortgage?

Typically an SVRs will be a higher rate than you can get on a fixed term mortgage deal, however, there are certain instances where a SVR can be helpful and work in your favour.

An SVR mortgage can be a suitable short-term solution

For example, if you’re in the process of moving house and you’ve not found a decent portable mortgage, or your moving date does not quite match up with the end date of your current mortgage.

The reason for this is that an SVR generally allows greater flexibility than with fixed-rate or discount-rate mortgages. Most standard variable rate mortgages allow for unlimited overpayments, for example, and as you’re not on an offer with an end date (such as a three-year discount-rate), you will not be charged early exit fees if you want to switch your mortgage.

You also avoid set-up or arrangement fees when you’re put on your lender’s SVR from your previous mortgage product - although this saving will not equal the extra money you will pay on an SVR mortgage over the longer term.

Whatever your situation, make sure you do your sums first. Check you’re not throwing money away by sticking with an expensive standard variable-rate mortgage.

What are the disadvantages to a SVR mortgage?

Although there can be benefits to variable mortgage rates, there are also downsides to consider.

Current variable mortgage rates may increase

There’s no getting away from the fact that variable rate mortgages are more risky than their fixed rate counterparts, because rates could go up at any time. If you’re not prepared for an increase, or they go up more than you can afford, you could find yourself in real financial trouble. That’s why it is vital to ask yourself if you could afford the monthly repayments if rates went up significantly, and use a mortgage repayment calculator to make absolutely sure.

What is a tracker mortgage?

Tracker mortgages are variable rate mortgages that follow, or “track” an external rate – typically the Bank of England’s base rate. This means that if the base rate goes up (or down), so does the interest rate on your mortgage, which alters your monthly payments.

Although trackers follow the base rate, they do not exactly mirror it and are ordinarily a set percentage above or below the base rate itself. Before the financial crash in 2008, tracker rates were usually set below the base rate (which was 5.75%), but now that the base rate is so low (0.10% as at October 2020) tracker rates are invariably set above it.

For example, a tracker mortgage might offer you an interest rate of the base rate (0.10%) plus 1%. So the amount of interest you would pay in total is 1.10%. Tracker mortgages are usually fixed at a set amount above the base rate for a period of time: 2, 3, 5 and 10 years are the most common terms.

Generally speaking, the longer the length of the deal, the higher the interest rate. So, the rate for a 10-year tracker mortgage might be the base rate plus 3%, setting your interest at 3.10% according to the current rate of 0.10%. Introductory offers on tracker mortgages can often be very attractive and have historically been lower than fixed-rate mortgage deals.

Collar and cap rates

Although tracker mortgages follow an external rate, your lender can apply what’s known as a “collar rate”, which is a minimum rate for your mortgage repayments. This means that even if the base rate were to drop below the collar, your interest rate would not. What this does is safeguard the lender against negative interest mortgages – where the lender would pay you interest, rather than the other way around.

The opposite of a collar rate is a “cap rate” or maximum rate of interest you could have to pay. Not offered by all lenders, this could be worth having in the current low interest rate environment, even though it will only generally protect you if the base rate goes up very dramatically. Ask your lender or broker directly if your mortgage includes a cap and/or collar rate, and check your key facts illustration closely.

What is a discount-rate mortgage?

A discount-rate (or discounted rate) mortgage offers a discount on the lender’s SVR for a set amount of time – usually two or three years. Although the discount itself is set in stone (for example at 2%), your repayments could go up or down if the lender’s SVR changes - usually, but not always, in line with the base rate.

For example, if the lender’s SVR is 4% and the discount rate is 2.5%, your interest rate will be 1.5%. But if the SVR goes up to 4.5% (which it can do at any time at the lender’s discretion), your mortgage rate would increase to 2%. Ultimately, it is not the rate of the discount that matters, but the actual amount of interest you’ll be paying the lender every month.

That’s one reason why many people choose a tracker mortgage that follows the Bank of England base rate; there is no danger of the lender choosing not to pass on any base rate cuts, or deciding to increase its SVR. When you take out a discount rate mortgage (as with a fixed term tracker mortgage), it’s also important to plan to avoid automatically reverting to the lender’s full SVR at the end of the deal, as this could be extremely costly.

Is a variable rate mortgage right for me?

There’s no getting away from the fact that variable rate mortgages are more risky than their fixed rate counterparts, because rates could change at any time. Before you decide which type of mortgage is best for you, there are steps you can take to find out more information:

  • Carry out a standard variable rate comparison Use a comparison tool to compare the best available variable rates available at present. Find out how much you will pay in interest and compare the best mortgage deals to suit your requirements.

  • Use a variable mortgage rate calculator If you’re thinking about taking out a variable mortgage, you can find out how much interest you could pay if the mortgage rate goes up or down using a calculator. See how interest rate changes will affect your monthly repayments and determine whether or not a variable rate is the best option for you.

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Last updated: 13 January, 2022