Variable Rate Mortgages

Variable rate mortgages are mortgages based on the standard variable rate offered by lenders. It is variable because it is linked to the Bank of England base rate. As well, it is the rate you are automatically switched to when your initial mortgage agreement period ends.

How Lenders Decide on a Rate

This type of mortgage can be expensive. Mortgage lenders set their standard variable rate depending on the movement of the Bank of England base rate. The level at which the standard variable rate is set varies between different lenders, but a general guideline is between 1.5% and 3.5% over and above the Bank of England base rate. Standard variable rate mortgages are not fully managed by the rise and fall of base interest rate changes made by the Bank of England. Tracker mortgages are more closely linked to these shifts.

The standard variable rate is decided at monthly meetings of the bank’s monetary policy committee, or MPC. Every time the MPC raises its rate, lenders will raise their standard variable rates. Every time the MPC lowers its rate, the lenders will also lower, but often not as fast.

Advantages

This type of mortgage generally allows the borrower to switch from a standard variable rate mortgage to another mortgage with no early redemption fee. Furthermore, if the Bank of England base rate falls, your mortgage payments may also fall.

Disadvantages

The risk with variable rate mortgages is when there is a large increase in the Bank of England base rate; the lender will increase its standard variable rate. The ability for mortgage borrowers to budget is also reduced, and if interest rates slide, lenders do not have to pass this down to borrowers. Those people looking for fixed mortgage repayments may be better off opting for fixed-rate mortgages. It is never too late to remortgage for a better deal. Make sure you check the terms and conditions.

Lenders

Mainstream lenders - Includes banks, building societies and other financial institutions that target borrowers with sound credit ratings. They normally set their standard variable rate at about 2 percentage points above the Bank of England’s base lending rate. However, some lenders will set their rates higher, while others, trying to increase their customer base, might set their rates a little lower.

Bad Credit Lenders - Specialize in lending to customers with poor credit histories. By taking a greater risk, they set their standard variable rates much higher. If you have a reasonable credit history, you should never actually pay this rate. This is because lenders also offer a range of far cheaper fixed interest and discounted variable rate deals.

Considerations

Although variable rate mortgages give you the freedom to change your mortgage provider at any time without a redemption penalty, it is recommended that you do not get locked into a standard variable rate. Your budget ability is reduced and lenders do not always provide the equivalent movement in the Bank of England's base rate. When considering a variable rate mortgage, it is highly recommended that you seek an independent mortgage specialist’s advice. A specialist can provide all of your options.