What is a variable rate mortgage and how does one work? | YBS
Reading time 5 minutes
At a glance:
An interest only mortgage means during the term, you only pay off interest, instead of the capital borrowed from a lender.
At the end of the term, you pay off all the money borrowed at once.
How you'll pay back the capital is called a repayment strategy.
How does a variable rate mortgage work?
If you’re buying a home or remortgaging, you may be deciding between a fixed or variable rate mortgage.
A fixed rate mortgage means your interest rate stays the same for a set period of time.
A variable rate mortgage means the interest rate and amount you pay each month could go up or down.
How does the base rate affect a variable rate mortgage?
The interest rate on a variable mortgage will be impacted by the Bank of England base rate. This is the rate the Bank of England charges banks and building societies to lend money. The base rate can change fairly often.If the base rate rises, your monthly repayments might cost more, and if interest rates fall, you might pay less.
Types of variable rate mortgage
Tracker mortgage
A tracker mortgage follows the Bank of England base rate, plus the percentage set by your lender.A tracker mortgage will last for a set amount of time, such as two or five years.
Standard variable rate (SVR)
When your mortgage deal ends, you may be put onto a standard variable rate mortgage. This is the basic rate of interest used by a lender. It is usually a higher interest rate than a fixed rate deal.
Discounted variable rate mortgages
A discounted rate mortgage offers a discount on the standard variable rate for a certain period of time, often two or three years.
While the discount itself is fixed, this type of deal is still a variable rate mortgage as the lender can change the SVR interest rate whenever they like.
Should I choose a fixed or variable rate mortgage?
To help you decide, here are some questions to consider:
How flexible do you want to be?
Variable rate mortgages can offer more flexibility than fixed rate mortgages. You may be allowed to overpay by more than 10% a year with a variable rate mortgage. Make sure you check your mortgage terms before overpaying.What are your outgoings like?
If your mortgage repayments went up, could you still afford it? Make sure you are confident that you can cope with any changes.How do you see the economic outlook?
The Bank of England sets the base rate according to wider economic trends, if you predict rates will rise, your interest rate will rise too. If you think it will go down, your repayments could go down too.How to work out your variable rate mortgage payments
The amount you pay will depend on lots of factors, including:
The size of your deposit (if you’re buying a home) or if you’re remortgaging, your equity (the value of the home versus what you owe)
Your mortgage term
The type of mortgage (capital repayments or interest only).
To estimate the cost of a mortgage, try our handy mortgage calculator.
Variable rate mortgages
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The content on this page is for reference. It is not financial advice.
For help with money issues, try MoneyHelper.
For help with money issues, try MoneyHelper.
