Best variable rate mortgages

All mortgage providers have their own standard variable rate (SVR). This is a rate that you’ll move onto once your existing deal ends unless you switch straight to a new deal.

This rate is set by the provider and is usually higher than most other options. This means that your monthly payments will probably increase while you’re on a lender’s SVR. The rate is influenced by things like:

• The Bank of England base rate

• Cost of borrowing

• Market competition

A tracker mortgage is a variable-rate mortgage that follows the Bank of England base rate. That means whenever the base rate changes, your tracker rate will change by the same amount.

A tracker rate will usually be a set percentage plus or minus the base rate, for example, 1% plus the base rate. That means If the base rate is set at 5.5%, the interest you pay on your repayments will be 6.5%. If the base rate then went up to 5.75%, your rate would immediately increase to 6.75%.

Tracker mortgage deals can last for a set period of time, like two, three or five years. Once your deal ends, you’ll move on to the lender’s SVR unless you switch to a new product.

A discount, or discounted, mortgage has an interest rate that is set at a fixed percentage below the lender’s SVR. 

For example, let’s say the discount mortgage is set at 1% below the provider’s SVR. That means if their SVR is currently 7.5%, you will be charged an interest rate of 6.5% on your mortgage repayments.

As these change when the SVR changes, it will be up to your lender whether your rate goes up or down. For example, even if the base rate goes down, that doesn’t mean your lender will automatically reduce their SVR.

When you come to the end of your tracker or discount mortgage deal, you will move on to your lender’s SVR. 

To avoid this, you can arrange to remortgage to a new deal or do a product transfer with your existing provider. Most lenders will contact you at least three months before the end of your deal with their current products for existing customers.

Mortgage collars or caps are limits that are sometimes attached to variable-rate mortgages. 

A collar, or ‘floor’, is a limit that your interest rate cannot fall below, despite what happens to the base rate or the lender’s SVR. For example, if the collar is 3%, no matter what external factors change, your rate will not go lower than 3%.

A cap, on the other hand, is a ceiling that your interest rate cannot rise above. This can offer protection if interest rates increase significantly while you’re on a variable rate.

Check to see if any collars or caps apply before you take out a variable-rate mortgage.

The Bank of England meets around eight times a year to review the base rate and decide whether it should change. The main reason the Bank of England will adjust the base rate is to try to keep inflation as close to 2% as possible - so at times of high inflation, the base rate can change more dramatically.

The base rate will not change every time the Bank of England meet, and it can remain unchanged for long periods during times of economic stability.

Variable-rate mortgages will come with the same fees and costs as any other mortgage, including:

• Arrangement fees

• Transfer fees

• Interest rate

• Early repayment charges

Variable-rate mortgages often have lower arrangement fees and early repayment charges than fixed-rate mortgages.

As with all mortgages, the biggest cost will be the interest rate you are charged on your repayments.

It is possible to pay off your variable mortgage before the end of the term; however, you may face early repayment charges. If you are on the lender’s SVR, you can repay your mortgage at any time without penalty. 

Most tracker and discount mortgages will have a set deal period similar to a fixed-rate deal. If you want to leave your deal during this time, you will usually have to pay early repayment charges, but these can be lower than fixed-rate mortgages. 

Which option is better for you depends on your personal circumstances and your attitude to risk.

Variable-rate mortgages can offer lower interest rates; however, there is always the risk that your repayments could increase at any time. 

Fixed-rate mortgages offer the security of knowing that your repayments will stay the same for two, three, five or even ten years. This makes budgeting easier and protects you against any external interest rate rises. 

However, if rates fall, you won’t see the benefit, and you may find yourself locked into a more expensive deal.