The lowdown on variable rate mortgages

10 July 2019

Stephen Little has hunted through the mass of financial products and data to bring you this month’s best variable rate mortgages

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A variable rate mortgage will fluctuate in line with interest rates, so your monthly mortgage repayment can go up as well as down.

The biggest advantage of taking one out is that it will typically start at a lower rate than a fixed-rate mortgage.

As you are taking the risk that the interest rate may go up, your lender will be prepared to offer you a lower rate.

There are three main types of variable rate mortgage – tracker mortgages, standard variable rate (SVR) mortgages and discount rate mortgages.

Tracker mortgages follow the base rate of the Bank of England. It is usually a percentage point or two higher than the base rate and goes up and down in line.

With a discount rate mortgage, the lender will give you a discount off the SVR for a set period of normally two to three years. So if the SVR is 4.5% and the discount is 1.5%, the mortgage rate will be 3%.

The SVR is a fixed rate set by the lender, which can change it any time. While it is not tied to the Bank of England base rate, it will still often go up or down with it.

Should you take out a variable rate mortgage?

While a tracker mortgage could help you save money, if the Bank of England base rate goes up you will find yourself paying more each month, and more overall on your mortgage. Tracker mortgages are therefore best for people who believe the base rate will fall or stay the same, but can also afford higher payments if there is a rise.

Similarly, with a discount mortgage, the lender could change the SVR at any time, so your repayments could become more expensive.

Fixed or variable

Most people take out a fixed-rate mortgage over a two- or five-year term. When it comes to choosing between a fixed or variable rate mortgage, a lot will depend on your individual circumstances.

While you could benefit from a cut in interest rates with a variable rate mortgage, if you are not prepared for rate rises you could face financial hardship.

If you are looking for long-term stability and want to know exactly how much you will be spending, a fixed-rate mortgage might be better for you as if the base rate goes up your repayments will remain the same.

Capped deal

Those who want more security with a variable rate mortgage can opt for a capped deal.

This guarantee that your interest rate won’t go above a certain level, but you will also benefit from lower payments if rates go down. They are normally for an introductory period, usually from two to five years.

One of the best deals out there for first-time buyers is from Skipton Building Society, which has an initial rate of 2.32% for two years, which then reverts to the SVR (currently 4.99%).

For a first-time buyer with a 10% deposit looking to buy a £200,000 property over 25 years, the monthly cost is £791 putting the annual cost at £9,495.

For someone looking to remortgage their £200,000 property with £100,000 left on their mortgage over 15 years, Hanley Economic Building Society currently offers the cheapest discount variable rate deal at 2.19% for two years. This mortgage comes with no scheme fees and cashback of £1,000 for an annual cost of £7,327.

FEATURED PRODUCT

Leeds Building Society 1.73%

Leeds has the cheapest mortgage available for home movers, charging 1.73% for those with 25% deposit.

With a £180,000 mortgage over 25 years on a property worth £300,000, this would cost £8,802 a year or £734 a month.

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