A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Unlike fixed-rate mortgages, variable rate mortgages have interest rates that can fluctuate up and down. This means your repayments may vary every month. If you’re looking for a sense of security in knowing exactly how much money will be coming out of your account each month, it might be better to opt for the stability offered with a fixed-rate mortgage where interest charges are expected to remain static over an agreed period of time.
When choosing a mortgage, there are three primary types of variable rate options to consider:
- Standard variable rates (SVRs): With standard variable rates (SVRs), the mortgage provider is in charge of deciding when and how to make changes.
- Discounted rates : Discounted Rates are calculated as a discount from a reference rate; typically a discount from the lender standard variable rate ( )
- Tracker rates: Tracker Rates are connected to the Bank of England’s base rate; any fluctuations in that rate will cause your interest costs to rise or fall accordingly.
Please remember that a mortgage is a loan secured against your home. Your home may be repossessed if you do not maintain repayments on your mortgage or any other load secured against it. You may have to pay an early repayment charge to your existing lender when you remortgage.
SVR stands for standard variable rate, and it is determined by your mortgage lender – each company will have their own SVRs that they adjust based on multiple factors. These rates may not be instantly correlated to the Bank of England’s base rate, but are likely still affected by any modifications made to it.
Your interest rate might be altered due to regulatory modifications, internal business objectives, or your lender’s cost of borrowing. Furthermore, when a fixed-rate mortgage deal comes to an end you will be switched over automatically to the lender’s SVR (Standard Variable Rate) unless you determine otherwise and re-mortgage.
Although SVR mortgages tend to be the priciest option in the market, they also offer unparalleled benefits such as flexibility for changes and unlimited capacity for overpayment.
The benefits and downsides
- No restrictions to make any overpayments
- You can exit your mortgage contract (i.e. sell the property and redeem the mortgage) without penalty at any time.
- An SVR mortgage offers unparalleled flexibility compared to other mortgages. Usually, there are strict limitations on how much you can pay off without paying any extra fees; however, with an SVR mortgage, this isn’t the case as you’re free to make overpayments at no cost. This is especially beneficial if your goal is to use discretionary cash reserves in order to reduce the duration of your loan more rapidly.
- SVRs provide you with the ability to change mortgage lender or deal without incurring an early exit fee. On the other hand, most mortgages – particularly those of fixed-rate deals – will charge a penalty if you choose to remortgage before your set term is over. Therefore, if moving homes soon is in your plans, it may be best for now to remain on an SVR.
- Unpredictable, as they can go up or down at the discretion of the mortgage lender
- Sadly, SVRs have a significant downside in the long run: they are usually the most costly deals out there. To put it into perspective, you could end up forking out thousands of pounds over the duration of your mortgage due to the high interest rate.
- Not knowing when and by how much the SVR is going to shift can be a major downside, as it makes planning and budgeting your future mortgage payments quite unpredictable.
3 types of variable-rate mortgages
Tracker mortgages are directly linked to a reliable economic indicator, such as the Bank of England base rate. This means that fluctuations in your mortgage interest rate will be predictable and easily monitored due to the fact that changes made in the Bank of England’s base rate are widely reported on. With this knowledge you can make informed decisions when it comes to your finances as well as plan ahead more effectively than with other variable rates.
Many tracker mortgages are calculated as a percentage above a reference rate, such as the base rate plus an additional fixed amount. These deals will typically last from two to five years; however, there may be some offers that span beyond this timeframe.
Longer tracker rate deals may come with a collar or cap, but caps are very rare. A collar (or floor) is a set rate that your mortgage interest rate will not fall below. This means that if the Bank of England base rate (or other financial indicator) falls to 0, but your deal is capped at 0.3%, then you will still have to pay 0.3%.
A cap (or ceiling) is a guarantee that your mortgage will never rise above the defined amount, regardless of what happens to the financial indicator it’s following. For this reason, they are very rare, but also not as competitive as tracker rates without a cap, as they are riskier for the lender.
Each lender sets its own standard variable rate (SVR) for mortgages, which can be 5% or more above the Bank of England’s base rate.
However, the SVR is set at the lender’s discretion and can go up or down at any time for a number of reasons.
Obtaining this type of mortgage can prove costly, and it is the rate most borrowers will be set at once their current mortgage term ends. Yet for certain situations, staying put on the SVR may make sense – such as if you are in process of relocating soon. Fortunately, you won’t need to worry about paying any Early Repayment Charges (ERCs), giving greater flexibility when your fixed-term finishes up.
Discount rate mortgages
Variable-rate mortgages come with a discount on the lender’s SVR. For instance, if a particular lender has an SVR of 6%, and if they would offer borrowers a 2% discount, it would mean that the “discount rate” will be 4%.
Interest rates can fluctuate according to the lender’s SVR, yet you remain entitled to a fixed discount over that rate. This translates into different monthly payments as needed. For most loans, terms last somewhere between two and five years; however lifetime-discount mortgages are also obtainable.
The difference of variable rates and fixed rates
If you choose a variable-rate mortgage, your interest rate will fluctuate and consequently, so too will your repayments. Alternatively, a fixed-rate mortgage offers stability by securing the same set interest rate for an agreed period of time; allowing you to make consistent payments without having to worry about increasing rates. However, be aware that one downside is that the initial cost may be higher than with other types of mortgages due to the security they provide against rising rates.
The duration of variable rate offered
While you can choose to stay on the lender’s SVR for your entire mortgage term, this is usually not the most affordable choice. Discount variable rate and tracker rate mortgages are often available from 2-5 years but they may also be extended to cover your entire loan period. Given that a typical mortgage term lasts 25-30 years it may not be in your best interest as your circumstances can change (e.g. you may decide to sell the property and live somewhere else) or property prices and interest rates could increase in the long run.
What comes after my variable rate mortgage deal expires
Upon the completion of your tracker or discount mortgage deal, you will be transferred to your lender’s standard variable rate. If this SVR is greater than what was offered with the original plan, then it could lead to higher repayments. To avoid such an outcome and keep costs low, take some time shopping around for another deal that better suits your needs.
Is paying off my variable rate mortgage before it ends possible?
Repaying or switching to a more affordable deal before the end of its term can be costly if you have a tracker or discount mortgage. But, those on an SVR (Standard Variable Rate) are able to pay off their mortgages free-of-charge. Additionally, lifetime tracker deals usually do not carry any early repayment fees.
Simple explanation of discount variable-rate mortgages
When you choose a discounted SVR (Standard Variable Rate), your lender could give you an advantageous rate that is 1-2% lower than the Standard Variable Rate. However, if they change the SVR afterward, then your payments will also adjust, but maintain their discount benefit. Generally speaking, these offers last between one to five years; yet there are exceptions where contracts may extend for longer periods of time.
The difference between mortgage collars and mortgage caps
A mortgage collar, or “floor,” promises that your interest rate will never dip beneath a certain point – no matter how low the base rate may drop. For example, if you have a tracker mortgage following the base rate, it’s likely that your lender has agreed to not let the interest level fall below 0.20%, even if this is what happens with other financial indicators.
Unlike floors however, mortgage caps are much less common and serve as an agreement between borrower and lender that says they won’t ever go above a particular amount – regardless of fluctuations in finance markets.
Get support from the expert.
Whether you are thinking about getting your first mortgage, and need help and guidance on what mortgage type may best suit your needs, or review what may be done about the increased mortgager monthly payment, it is generally a good idea to talk to an experienced mortgage broker.
Your Mortgage Experts have the knowledge and experience to help and guide you, and advice on the most suitable available options.
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Luca BertolinoMortgage Expert
Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.