19 Jul 2022
What is a variable rate mortgage product?
A variable rate mortgage product is a preferential interest rate offered by a lender for a set period of time. Typically, they are offered for two or five years and will be cheaper than taking the ‘Lenders Standard Variable Rate’. As it says in the name, the preferential interest rate offered is ‘variable’ and can fluctuate depending on the type of product you have.
Different types of variable rates
Standard Variable Rate
A Standard Variable Rate (SVR) is a default interest rate set by each lender which normally kicks in when your initial fixed or variable product ends (unless you remortgage elsewhere). Sometimes these fluctuate with the Bank of England base rate, but ultimately the lender will decide what their Standard Variable rate is. Lenders SVR’s tend to be higher than initial fixed or variable products, which is why most people will remortgage to avoid moving onto this default rate.
A Tracker mortgage is a variable rate product which ‘tracks’ the Bank of England Base Rate at a set percentage. This means that if the base rate increases, so does the rate of interest you pay on your mortgage. Likewise, if the base rate goes down the rate of interest would reduce. These are most commonly offered for an initial two year period, although there may be longer options available.
This type of product will have a set interest rate above the base rate, for example:
Initial interest rate which is 1% above the Bank of England Base Rate, which is currently 3.00%*. This means your rate of interest payable on your mortgage will be 4.00%.
Once the initial product finishes your mortgage will revert to the lenders Standard Variable Rate which is normally significantly higher.
A Discount rate mortgage product is a variable rate product which is set at a certain amount below a lenders Standard Variable Rate (SVR). The discount offered will remain the same for the set period of time. These products are variable, because if the lenders standard variable rate changes, the actual interest rate you pay will also change. The lenders are in control of the SVR rate they charge and this can change at any time. This type of product will have a set interest rate below the lenders SVR, for example:
Discount rate set 2% below the lenders Standard Variable Rate (SVR) which is currently 5.50%. In this example your rate of interest payable would be 3.50%.
Once the discount period ends, your mortgage will revert to the lenders Standard Variable Rate which is normally significantly higher.
Are variable rates cheaper than fixed rates?
There has been a lot of economic uncertainty in recent months leading to most fixed rate mortgages increasing as it becomes high risk for lenders to lend. We haven’t seen the same sharp increases with variable rates so they may look competitive compared with fixed rates, however they do come with increased risk. As they are variable your rate of interest you pay your lender can change at any time.
In a time where there is so much uncertainty, we would need to establish whether a variable rate is better suited to you compared with a fixed rate. We would need to discuss your risk apetite and make sure you are fully aware of what were to happen should rates increase.
What are the pros and cons of variable rates?
As with any mortgage products there are pro’s and con’s to variable rates. The obvious benefit being if interest rates reduce, your mortgage interest rate will reduce too. Variable rate products can sometimes be found with no ‘Early Repayment Charges’ meaning you can leave that particular rate at any time with no exit fees (this can depend on the lender and their product range at the time).
SVR rates usually come with no exit fees which can provide great flexibility for overpayments or clearing the mortgage balance fully – they are however more expensive.
The main downside of variable rate products are if interest rates increase, as we’ve seen in the last 12 months, the rate of interest you pay does too. This will be influenced by the base rate or the lenders SVR.
In short, variable rates are looking more attractive than fixed rates at the moment but we highly recommend getting advice from a professional to establish whether this type of product would suit your circumstances.
Please contact us on 01252 214044 or email on email@example.com if you wish to discuss your options.
Your home may be repossessed if you do not keep up repayments on your mortgage.
*The base rate quoted in this article is correct at the time of writing and may have changed since.