Variable Rate Mortgages Explained

What Is a Variable Rate Mortgage?

A variable rate mortgage is any mortgage where the interest rate can change during the loan term. Unlike a fixed rate mortgage, your monthly repayments may increase or decrease depending on movements in your lender's rates or the wider economy.

There are several types of variable rate mortgage available in the UK, including standard variable rates (SVRs), tracker mortgages and discount mortgages. Each works slightly differently, but they all share the common feature that your rate is not locked in.

Variable rate mortgages can be attractive when interest rates are low or falling, as they may offer lower initial rates than fixed deals. However, they carry the risk that your payments could rise if rates increase.

Types of Variable Rate Mortgage

Standard Variable Rate (SVR): This is the rate your lender charges once any introductory deal period ends. It's set by the lender and can change at their discretion, though it's influenced by the Bank of England base rate. SVRs tend to be higher than introductory rates, which is why most borrowers remortgage before moving onto one.

Tracker Mortgage: A tracker rate follows the Bank of England base rate by a set margin. If the base rate goes up by 0.25%, your mortgage rate rises by 0.25% too. Trackers offer transparency but no protection against rate rises.

Discount Mortgage: A discount mortgage offers a reduction off the lender's SVR for an introductory period. For example, SVR minus 1.5% for two years. Your rate can still change if the lender adjusts their SVR, making these less predictable than trackers.

Advantages of Variable Rate Mortgages

Variable rate mortgages can offer lower starting rates compared to fixed deals, particularly tracker and discount products. This can mean lower monthly payments initially, freeing up cash for other purposes.

If interest rates fall, your payments will typically decrease too. This automatic adjustment means you benefit immediately from any rate cuts without needing to remortgage.

Many variable rate products come with fewer restrictions and lower or no early repayment charges. This gives you greater flexibility to overpay, remortgage or move house without facing financial penalties.

Disadvantages and Risks

The main risk is that your payments can increase, sometimes significantly. If the Bank of England raises the base rate or your lender increases their SVR, your monthly costs will go up. This unpredictability makes budgeting more challenging.

Borrowers on standard variable rates are particularly vulnerable, as lenders can raise the SVR at any time and by any amount, not necessarily in line with base rate changes. Historically, SVRs have been among the most expensive ways to borrow.

If you're risk-averse or on a tight budget, a variable rate may cause unnecessary stress. It's important to consider whether you could comfortably afford your repayments if rates were to rise by two or three percentage points.