Variable Rate Mortgages
The key feature of a variable rate mortgages is that the interest rate on the mortgage is subject to change over time. There are several types of mortgages that come under the umbrella term ‘variable rate’, including:
Standard variable rate mortgages
This kind of mortgage will charge an interest rate that follows your lender’s Standard Variable Rate (SVR). This is a rate of interest set by the lender that is usually broadly in line with the movements of the Bank of England Base Rate, so if the base rate goes up, the SVR is likely to also go up. However, mortgage lenders are not obliged to track the base rate with their SVR – it is set by them individually. As an example, if the Bank of England Base Rate went up by 0.5%, your lender could choose to increase the SVR by the same percentage, increase it by a higher or lower percentage, or take no action.
Advantages of a standard variable rate mortgage include:
- Discounts – many lenders offer a discounted variable rate for a fixed period after the mortgage starts, which could offer the opportunity for lower monthly payments in the short term.
- The opportunity to take advantage of low market rates – at the time of writing the base rate is at an historic, ongoing low of 0.5%, which broadly speaking means that mortgage interest rates are also relatively low.
- Lower fees – arrangements fees tend to be lower for standard variable rate mortgages.
- Early repayment charge exemption – standard variable rate mortgages may be easier to exit or overpay than other types of mortgage, as they may allow these actions without levelling a fee.
Disadvantages of a standard variable rate mortgage include:
- Lack of predictability – rates may be at a current low, but there is no guarantee this will continue into the future. If rates rise, your payments will rise too, which could leave you struggling to make repayments each month. Increased affordability checks following the introduction of new lending regulations in April 2014 are intended to prevent this situation occurring, but the only sure way to avoid the possibility of rate increases is to opt for a fixed rate mortgage.
- Standard variable rates do not usually offer the best deal – they tend to represent the interest rate you would be automatically moved to once any fixed rate or discounted deal ends, so it makes sense to shop around.
Base Rate tracker mortgages
Base rate tracker mortgages, as the name suggests, follow the Bank of England Base Rate. This Therefore, if the base rate goes up, your monthly payment rises. Likewise, payments fall if the base rate falls.
Advantages of a base rate tracker mortgage:
- Benefit from record low rates - Since March 2009 the base rate has been at a record low of 0.5%, which could make a base rate tracker mortgage seem an attractive option. However, watch out for collar rates (see below for details).
- Choice of tracker period – many mortgage providers offer the flexibility to choose from tracker mortgages ranging from a few years to the entire life of the mortgage, so you can choose the type that best suits your lifestyle.
Disadvantages of a base rate tracker mortgage:
- Risk of future base rate rise - be aware that the base rate is likely to rise again in the future (some experts predict this could occur by 2015), which would mean higher payments each month.
- Collar rates – many mortgage lenders put a minimum level, known as a collar rate, on their base rate tracker mortgages. This means that if the base rate goes below the collar rate, your mortgage interest rate won’t go down any further.
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