What is a variable rate mortgage?

A variable rate mortgage is a type of mortgage loan in which the interest rate can fluctuate over time, based on changes in the market interest rates or other factors determined by the lender. 

The interest rate on a variable rate mortgage is typically tied to an index, such as the prime rate or the London Interbank Offered Rate (LIBOR), and can change periodically, often every month or every year.

As a variable interest rate can change over time, it can provide less certainty about how much you need to pay for your mortgage each month.

How variable rates differ from fixed rates

When you take out a mortgage, you’ll be able to choose a fixed or variable rate mortgage. 

Fixed mortgages have interest rates that are set for a period of time. They let you know exactly what you’ll pay each month for the whole fixed period.

With a variable rate mortgage, the interest rate can change at any point of the mortgage, meaning your monthly payments could change.

There are three primary types of variable rate mortgages, each with its own features and benefits.

1. Standard variable rate mortgages

This is the most basic type of variable rate mortgage, where the interest rate can fluctuate over time based on changes in the market interest rates or other factors determined by the lender.

Every lender has its own Standard Variable Rate (SVR). However, borrowers tend not to choose SVRs as they are often high. The average SVR reached a high of 5.25% in August 2022. ¹

Customers often roll onto an SVR after their fixed rate, tracker or discount period ends.

2. Tracker mortgages

A tracker mortgage is a type of variable rate mortgage where the interest rate is tied to an external benchmark, such as the Bank of England base rate or the LIBOR. The interest rate will "track" the benchmark rate, meaning that it will move up or down in line with any changes to the benchmark rate.

Tracker products usually last 2 or 5 years, but you can also get 3-year, 10-year and ‘lifetime trackers’. These track the base rate for the lifetime of the mortgage.

Your tracker mortgage could include a minimum interest rate or 'collar'. The interest rate will never fall below this so the lender will always make some profit. 

Some lenders will also have a cap to restrict the maximum rate.

Some tracker mortgages have no Early Repayment Charges (ERCs). This allows you to make larger overpayments or repay the mortgage in full without being charged a fee. 

3. Discounted variable rate mortgages

A discounted variable rate mortgage offers an initial discount off the lender's standard variable rate. For example, the interest rate on a discounted variable rate mortgage might be set at 1% below the lender's standard variable rate for the first 2 years. 

After the initial discount period, the interest rate will revert to the lender's standard variable rate. 

Unlike other variable rates, discount variable rates track the lender’s SVR instead of the Bank of England base rate. This means the lender could change the rate. Most lenders only change the SVR if the Bank of England base rate rises or falls.

Discount mortgage rates are often fixed for a term. This term can last 2, 3, or 5 years, for example.

Once your initial term is over, you're likely to end up paying the lender's SVR.

If you’ve signed up to Better.co.uk, we’ll let you know when it makes sense to think about switching. This way you can avoid paying the SVR if you choose to look at other deals.

If you use Better.co.uk to find a mortgage, we’ll look at both variable and fixed rate options to recommend a deal. We'll base the deal on what we think would best suit your needs.