Mortgage types in detail

Variable rate mortgages

Variable rate mortgages

If you’ve read our simple guide to getting a mortgage or you’ve done your own research into mortgage types, you might have already heard the term ‘variable rate’.

In its simplest form, a variable rate mortgage is one where the amount of interest you pay can change. This can happen at any time, and it’s dictated by the lender, which is enough to make anyone gulp.

But there’s and upside: they can also work in your favour and save you money, especially if the interest rate drops lower than the lender’s fixed rate. Score!

Unlike fixed rate mortgages there are dozens of different subtypes. Here are some of the most common.

 

Standard variable rate (SVR) mortgages

With a standard variable rate mortgage, your lender can change the amount of interest you pay at any time. This is usually based on the Bank of England’s base rate, but it can also be adjusted for other reasons. With this kind of mortgage, it’s sensible to have a bit of extra cash saved in case your repayments rise.

Pros

  • There are usually more options here if you’re looking for a deal with no early repayment charges, so you can make overpayments or switch without penalties.
  • There often isn’t a ‘product fee’, i.e. the one-off fee you might pay for choosing some tracker or discount mortgages.

Cons

  • The rate can change monthly, which means you could end up paying more than you want to.
  • With a discount rate or SVR product, even if Bank of England interest rates fall, your mortgage interest rate might not (unlike a tracker). Remember, you lender gets to decide!

Tracker SVR mortgages

A ‘tracker’ mortgage is very similar to a standard one. The only difference is that the interest will only move up or down based on changes to the Bank of England’s base rate, and for no other reason. It’s worth noting that these mortgage deals, like fixed rate ones, are generally only available for a set number of years.

Pros

  • Your interest rate is transparent and won’t be arbitrarily raised by your lender. Phew!
  • When Bank of England interest rates fall, so will your mortgage repayments! However…

Cons

  • …When Bank of England interest rates rise, so will the rates on your mortgage.
  • Some tracker mortgages have caps on how low your interest rate will fall, regardless of Bank of England rates.

 

Capped mortgages

A ‘capped’ SVR mortgage is very similar to the standard one. The interest you pay will move up and down depending on what the lender decides is right. However, there’s a cap in place that means it won’t rise above a certain level.

Pros

  • You can rest easy knowing there’s a limit to how high your interest rate can rise, which makes budgeting far easier.

Cons

  • The cap can be set quite high, and your lender could change your interest rate up to this cap at any time. 
  • Once again, the cap is often in place for only a set amount of time, after which you’ll be moved to the normal SVR loan.

Discount SVR mortgages

Everybody loves a discount. With a ‘discount’ mortgage you’ll be offered the normal SVR mortgage with a certain percentage knocked off. So if your discount on the interest is 2%, you’ll pay 2% less interest than everyone on the normal SVR rate.

Pros

  • Your discount means that for the duration of your deal, you’ll pay less than the standard variable rate, which adds up to a nice saving.
  • If your rate is also attached to the Bank of England’s base rate, a low base rate combined with your discount could mean super low repayments.

Cons

  • These offers tend to have a time limit of a few years, after which you’ll be moved to the standard SVR mortgage.
  • There might be a limit on how low your interest rate can fall, so check this out.
  • If you’ve been lucky enough to benefit from low rates during your discount period, remember that going back to a ‘normal’ deal might be a bit of a financial shock.

 

Offset SVR mortgages

You’ll need a savings account with your lender (assuming it’s a bank) to get an offset mortgage.

In a nutshell, you’ll only pay interest on the difference between your savings account balance and your outstanding mortgage. 

Example

Let’s say you have a mortgage of £150,000 and there’s £20,000 in your savings account. You’ll only pay SVR interest on £130,000 of the loan, which is the difference between them.

Pros

  • You’ll usually have full access to your savings during this time, and you can add or withdraw cash whenever you want. 
  • The more you save, the less you’ll pay in interest. If you need an incentive to keep saving, this is it!
  • It’s great for people who have substantial savings that aren’t earning much interest sitting in a bank account.

Cons

  • You can’t earn interest on the savings in your linked savings account.
  • If you need to use your savings for something, your mortgage interest rate will go up.

Still not sure which mortgage type you should choose, or if variable rate mortgages are the right choice for you at all? That’s normal – and it’s the whole reason your mortgage broker exists. They can explain everything in more detail and help guide you to the best mortgage type for your circumstances.

If you haven’t already, you might want to read about fixed rate mortgages, a popular alternative to an SVR.

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