A mortgage is arguably the biggest financial commitment you’ll ever make, so understanding the options available to you is extremely important. To help you find the right mortgage for you, we’ve explained the key features of variable rate mortgages and how they differ from fixed-rate products.
What is a variable rate mortgage?
A variable mortgage rate is an interest rate which can move up and down at any time, meaning your monthly mortgage payments may occasionally go up or down to match this.
The interest rate on variable mortgages commonly change when there is a change in a market rate (such as the Bank of England base rate), but there doesn’t need to be a change in a market rate for the variable rate to change. There are different types of variable rate mortgages available – standard variable rate, tracker and discount.
Standard variable rate mortgage
Mortgage lenders have their own standard variable rate (SVR) for which they control any increases or decreases. This rate tends to follow the Bank of England’s base rate but can be significantly above that rate. Some important notes to consider about standard variable rate mortgages include:
- If the standard variable rate of interest drops, your repayments will too.
- Equally, if the standard variable rate of interest increases then so will your repayments.
- There’s usually no early repayment charge, so you can switch mortgages or pay in full at any time.
Mortgage lenders sometimes use different names for this type of rate, for example ‘Mortgage Variable Rate’ and they operate in a similar way to a standard variable rate.
Tracker Mortgage
Whilst a standard variable rate (SVR) mortgage fluctuates based on a lender’s own SVR, a tracker mortgage follows the Bank of England’s official borrowing rate, sometimes known as the base rate. This means that your repayments can occasionally go up or down based on economic changes.
Tracker mortgages usually track above the base rate, so you’ll be agreeing to a fixed percentage over the base rate for a fixed term. These particular mortgages can be popular during periods of falling interest rates, but there are a few things to consider:
- If the base rate decreases, so do your repayments.
- If the base rate increases, so do your repayments.
- You’re locked into a fixed term, even if interest rates jump.
Some tracker mortgages have an interest rate ‘floor’ or ‘collar’ that means your interest rate cannot fall below a certain percentage and may affect how much repayments can decrease.
Discount variable rate mortgage
A discount variable rate mortgage offers a discount off the lender’s standard variable rate (SVR) over a fixed term. There are a few things to consider when deciding if this is the right mortgage for you:
- You’ll pay a lower interest rate than the SVR during the fixed term.
- If the SVR decreases, then so will your repayments.
- Early repayments charges can sometimes be lower than fixed-rate deals.
- Whilst your term is fixed, your monthly payments aren’t so they could still go up.
Some discount variable rate mortgages have an interest rate ‘floor’ or ‘collar’ that means your interest rate cannot fall below a certain percentage and may affect how much repayments can decrease.
Variable mortgages available with Furness Building Society
At Furness Building Society we have four types of variable mortgage rates available:
- Standard Variable Rate (SVR)
- Buy to Let Standard Variable Rate (BTL SVR)
- Mortgage Variable Rate (MVR)
- Buy to Let Mortgage Variable Rate (BTL MVR)
Swapping your current mortgage to one of our variable rates
It’s important that all customers understand the implications of moving from a standard variable rate to a mortgage variable rate, as once you have made the change you will not be able to transfer back.
Some customers will have a mortgage deal which will move to one of the variable rates or ‘underlying rates’ above when their introductory fixed, tracker or discounted deal comes to an end.
What is a fixed-rate mortgage?
A fixed-rate mortgage is exactly how it sounds, fixed. This means that your interest rate is set for a fixed term, so your repayments will neither go up or down during that time regardless of changes in market rates.
Having a fixed rate can often provide customers with a sense of security knowing that their payments will remain at an amount they’re happy to pay, over a set time. Like any mortgage, it’s important to consider all your options before selecting the one that’s right for you.
A few points to consider about fixed-rate mortgages include:
- You know how much you’ll pay each month, helping with monthly budgeting.
- Your payments will not go up during the fixed term.
- If market rates drop, you wouldn’t benefit from lower repayments.
