Variable Rate Mortgage

A variable rate mortgage is the answer for any homebuyer who is prepared to take on an element of risk in order to potentially make savings on their mortgage payments. There are several types of variable rate mortgage, where your interest rate can either follow the Bank of England base rate or the lender's standard variable rate (SVR). The SVR is typically a couple of percentage points higher than the base rate, although lenders are not obliged to exactly reflect the base rate in the way they set their SVR. The variable rate mortgage that is linked directly to the base rate is known as a tracker mortgage.

Although a variable rate mortgage is likely to be cheaper that a fixed or flexible rate mortgage, it offers no protection against rising interest rates. Also, a variable rate that is dependent on the lender's SVR has no guarantee that Bank of England interest rate decreases are going to be passed on to you by the lender. To ensure that your interest rate will not fall below a level where it is not profitable for the lender to lend to you, a cap or 'collar' is usually imposed, which establishes the minimum monthly payment you will be required to make, regardless of the base rate at the time. Think carefully before taking out a variable rate mortgage in the current climate, because it is likely that interest rates are soon to rise.

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Variable Rate Mortgage: The Basics

• You may benefit from falling interest rates. With a variable rate remortgage, your interest rate will rise and fall with the national base interest rate. If the base rate falls, your rate will also decrease, thereby saving you money.
• You may run into some financial uncertainty. If the base interest rate rises, your monthly payments will increase as well. The instability of the interest rate you're paying may cause some uncertainty if it suddenly increases dramatically.
• Many lenders variable rates are not competitive. If you opt for a variable rate remortgage, the interest rate you begin with my not necessarily be competitive with other lenders. The lure of a variable rate is the possibility that your rate could decrease if the base rate decreases.