I’m Damian Youell an experience mortgage broker with over a decade of experience. I’m dedicated to helping clients by offering an efficient and friendly service.
Over the years we have streamlined our systems and procedures and adapted processes to enable us to make the whole process very straight forward and easy for our clients.
We pride ourselves on being very approachable feel free to contact me:
Variable Rate Mortgages
You may have heard of different types of interest rates when it comes to mortgages such as fixed rate and variable rate. As the name suggests, fixed rate mortgages mean the interest rate you pay during the length of your deal is fixed at a set amount. Typically, fixed rate deals last between two to five years. With variable rate, interest rate can change at any time.
In this article we discuss in further details the different types of variable rate so you can find the type of mortgage that is most suited for you.
What is variable rate?
Variable rate mortgage is a type of product where the interest rates can fluctuate up or down and this means your monthly repayment amounts could change to reflect this. This is how variable rate differs from fixed rate, as with fixed rate your monthly repayments are constant and stay the same month on month for the length of your deal.
The interest rate that is set for variable rate mortgages largely depends on economic circumstances and the Bank of England’s base rate.
There are three different types of variable rate mortgages called standard variable, tracker mortgage and discount mortgage.
Standard variable rate mortgage
Standard variable rate (SVR) is said to move in line with the Bank of England’s base rate but this is not always the case and will largely depend on the lender. Typically, standard variable rate is the interest rate that follows once a mortgage deal, such as fixed rate, comes to an end. It is a good idea to shop around two to three months before your existing deal comes to an end so you can benefit from a lower interest rate as generally standard variable rates tend to be higher than other types of mortgage deals.
The advantage of standard variable rate is that it allows a borrower flexibility as you are not tied into a deal and usually allow for unlimited overpayments whereas when you are tied into a deal, there could be limits and charges are applied if you go over the limits. If you are part way through a deal and you want to switch your mortgage product, there may be early exit fees involved.
If you require short term borrowing or know you are looking to move or make changes to your mortgage, then it is a better option to be on a standard variable rate as it allows you flexibility without potentially being charged fees. If you wish to use standard variable rate, then you should be aware that interest rates can do up or down at any time which could affect your monthly repayments so make sure you are still able to afford the payments should interest rate increase.
Tracker mortgages are deals that tend to last between two to five years, although some lenders may offer tracker deals that are longer in length. It works by moving directly in line with the Bank of England’s base rate plus a few percent.
For example, if Bank of England’s base rate increases by 0.75%, then your interest rate for your mortgage loan will increase by 0.75%. In times when interest rates is low, it is advantageous to use a tracker mortgage but be aware that it can also increase if Bank of England’s base rate increases.
Discount mortgages are a product that offers a discounted rate on the lender’s standard variable rate and are generally deals that lasts between two to three years. The amount that your discount is set out will be constant throughout the agreed term, although payments can fluctuate monthly if the standard variable rate changes.
For example, a lenders SVR is 4.5% and your discount rate is 2%. This means your interest rate will be 2.5%. If the lender’s SVR decreases to 4%, your interest rate will be 2% and so on.
Similarly to fixed rate deals, discount mortgages will need renewing and it is best to start looking two to three months prior to your deal ending or you will be reverted back to the lender’s standard variable rate with no discount applied.
What type of interest rate to use is dependent on an individual and their personal circumstances. If you are unsure and would like some further guidance, then get in touch with us today and a professional advisor would be happy to help so you can pick the type of product that is most suitable for you.