What is a variable rate mortgage?
A variable rate mortgage is any mortgage where the interest rate is not locked in for the whole term. Your rate, and with it your monthly payment, can change. That happens either because your lender decides to adjust its SVR, or because a benchmark rate such as the Bank of England base rate (the rate the central bank sets, which lenders price against) moves.
The UK has three main types. The standard variable rate is set by each lender on its own terms. A discount rate mortgage takes a set amount off that SVR. And a tracker mortgage follows the Bank of England base rate directly. Each one behaves differently, and each suits a different sort of borrower.
Standard variable rate: the default rate
Every mortgage lender has a standard variable rate. It is the rate you drop onto once an introductory deal ends, whether that deal was fixed, tracker or discount. The lender sets the SVR and can change it whenever it likes, for any reason it likes. In practice most SVRs move roughly in step with the Bank of England base rate.
An SVR is almost always higher than an introductory rate. In recent years typical SVRs have sat between 6% and over 8%, while introductory deals tend to be several percentage points lower. Spend any real length of time on an SVR and it can cost you thousands of pounds in interest you did not need to pay.
Very few borrowers should sit on an SVR by choice. If your deal has already expired and you have rolled onto one, look at a remortgage to a fresh deal as soon as you reasonably can. Our guide to remortgaging walks through what that involves.
Discount rate mortgages
A discount rate mortgage charges you a set amount below the lender’s SVR for an introductory period, usually two to five years. Say the SVR is 7.5% and your discount is 2%: you would pay 5.5%.
The catch is that the discount is applied to the SVR, and the SVR can move at any time, so your rate is not truly fixed during the discount period. If the lender puts its SVR up by 0.5%, your discounted rate goes up by 0.5% as well.
A discount deal can start lower than an equivalent fixed rate, and some come with smaller early repayment charges (the fee for leaving or overpaying beyond a set limit), which leaves you more room to switch or overpay.
Variable rate vs fixed rate: which is better?
Neither one wins every time. A fixed rate gives you certainty and works well if you need to know exactly what you pay each month. A variable rate can come in cheaper, but your payments might climb. Which is right comes down to your finances, how much payment movement you can stomach, and where interest rates sit at the time.
Plenty of people switch between fixed and variable rates over the years as conditions change. A mortgage adviser can help you judge which one makes more sense each time your deal comes up for renewal.
How to get the best variable rate deal
If a variable rate mortgage appeals, compare across the whole market rather than settling for whatever your current lender offers. Look past the headline rate to the detail: the margin above the base rate on a tracker, or the size of the discount below the SVR. Our repayment calculator lets you model different rates against your loan, and it is worth checking which early repayment charges apply and when.
At Clearview Mortgage Solutions, our advisers compare variable rate deals across 90+ lenders to find the right one for your situation. Get in touch for a free, no-obligation chat about your options.