A variable rate mortgage is, simply put, a mortgage with a rate that can change over time. This is in contrast to fixed rate mortgages, whose rates will explicitly not change until the term of the deal is at an end.
There are certain advantages to getting a mortgage with a variable rate. Predominantly, it means that your rate may go down over time. This will depend on the wider economic situation – if the mortgage market becomes more expensive during the term of your loan, the rate may go up instead. Of course, the rate being able to go up as well as down could just as easily count as a disadvantage, especially if you don’t have much leeway in your budget.
However, another advantage is that, because you’re taking a risk, providers will likely offer you a lower rate than on a fixed rate deal. So, if you can afford to pay a little more if necessary, you could choose to get a great variable rate deal.
To figure out if you should get a variable rate mortgage, take a careful look at your budget. Work out how much you can afford to pay towards a mortgage every month, then use our repayment calculator to calculate roughly how much the mortgage you’re interested in would see you pay every month on a repayment basis (or look at the representative example for a more generic estimate). If your budget exceeds the monthly payments by a comfortable amount, and you’re happy to take the risk, a variable rate mortgage could be for you.
Variable rate mortgages work in much the same way as fixed rate mortgages, with the same rigorous application process. The main difference will be in communications about your rate, as the lender may change it and therefore should keep you more informed during the term of the mortgage than would be the case with a fixed rate mortgage. Note that there are several different types of variable rate mortgages, discussed below, and the type can influence how wildly your rate may change.
There are three main subtypes worth knowing about which may be able to provide more risk-averse borrowers with another option aside from a fixed rate deal.
This type of mortgage comes with a rate that moves up and down in line with changes to the Bank of England base rate (so it tracks this external rate), meaning that your payments can fluctuate based on a measure that may be a bit more easy to predict than providers’ internal decisions. So, if you believe that base rate is due to decrease in the next year or so, this might be a good choice. Of course, if you’re interested in a tracker mortgage with a long term, base rate will become increasingly harder to predict.
Some tracker rate mortgages will come with a collar or cap. A mortgage collar refers to a minimum set rate that your mortgage won’t be able to go under, while a mortgage cap is a maximum ‘ceiling’ rate. The best tracker mortgages for the more risk-averse borrower may be those with a cap, rather than a collar, but unfortunately capped mortgages tend to be very rare. On the other hand, because you’re taking a bigger risk, mortgages with a collar or no outer limits at all will likely come with lower rates than those few mortgages that have a cap.
Standard variable rate mortgage
Most lenders offer a standard variable rate (SVR). The fees associated with taking out, or remortgaging from, an SVR mortgage are often relatively low. This is because many have low setup costs and no early repayment charges. Unlike a tracker, an SVR is set arbitrarily by each individual lender, so your rate may increase or decrease at any time.
The SVR tends to be the interest rate you fall back on after your initial mortgage deal ends, when it comes to both fixed and variable rate deals. As such, these deals will generally have higher rates than most other mortgage types in the market.
Discounted variable rate mortgage
Discounted variable mortgages are another form of variable rate mortgage, whereby the lender offers a discount on a certain rate, most commonly the lender’s SVR, in the form of an introductory term. You can find these in the comparison chart for discounted variable mortgages. For example a lender offering a 2% discount on its SVR of 4.50%, would charge 2.50% to the borrower.
Loan-to-value (LTV) refers to the ratio between the value of the property and the loan you are seeking. So, if you have a 10% deposit (£20,000 on a property worth £200,000), you’ll need a mortgage with a 90% LTV. The larger your deposit or equity from a previous home, the better the deal you will likely be offered.
To find out roughly how much you can borrow, and therefore how big a deposit you will need to cover the overall cost of the home, you can use our mortgage borrowing calculator. Once you know how much you will need to borrow compared to the value of the property, you will know your LTV. Remember when using the linked calculator to check if the rate you’ve put into it is realistic for the LTV mortgage you’re after, and adjust your calculations if necessary.
First-time buyers will likely have only a 5% deposit, and will therefore need a 95% LTV mortgage. If you look over at our first-time buyer chart, you will see that there are all sorts of mortgages available at this level, from discounted variable ones to fixed deals. You will most likely also notice that the rates on these deals tend to be much higher than on mortgages at lower LTVs. So, the more equity/deposit you have to offer, the better the mortgage deals you can expect to be offered.
As with other mortgage types, there may be arrangement fees to pay on the mortgage you are interested in. Additionally, there will be legal fees, valuation fees and (unless you’re simply remortgaging) moving costs to take into account. With the exception of SVR mortgages, which tend to come with low or no fees (but higher rates), there isn’t much difference between the types of fees you can expect with a fixed rate deal and those on a variable rate offer.
Both discounted variable rate mortgages and tracker rate deals can range from two years up to the entire lifetime of the mortgage. As the end of the overall term may be as much as 30 years away, however, there’s a high likelihood that the interest rate will rise over time, so the product could end up much more costly than remortgaging over several short-term deals. Think carefully and do some calculations before you commit to a variable for term deal, and make sure you can remortgage penalty-free if you change your mind.
If your mortgage deal allows overpayments, there’s nothing stopping you from paying more than the required monthly repayment amount. To completely pay off your mortgage while you’re on a deal, you’ll need to contact your lender and make sure that they allow this and don’t charge exorbitant fees for the pleasure.
Our mortgage calculator helps you to see how much your mortgage might cost you each month.
Our how much can I borrow calculator gives you a range of how much a lender might consider lending you under a mortgage. This calculation is only an indication only.
Read our How much can I borrow for a mortgage guide to find out more about what can impact your potential sum of borrowing.
If you make an official application, rather than a preliminary query, this will show up on your credit report and therefore influence it. Even a successful application could have a negative effect on your credit score for a little while, as it will count as a new loan. Once it matures a bit and you show that you can keep up with your repayments, your credit score should move upwards again and could even surpass its previous rating.
If you're looking for flexibility, have the potential to pay off additional sums and perhaps wish to pay off your mortgage early, then a variable rate mortgage could work for you. Make sure you receive full advice on this mortgage choice from either your mortgage lender or from an expert mortgage adviser.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.