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Variable Mortgages Explained

Variable mortgages can be a confusing term, since all mortgages apart from fixed rate mortgages are in fact a form of variable rate. However when used in terms of getting mortgage quotes a variable rate mortgage is a rate which follows the lenders standard variable rate.

All lenders have a standard variable rate which is the rate most of their mortgage products would revert to after the initial term of the mortgage. For example if you took a two year fixed mortgage it would normally change to the lenders standard variable once the two years were complete.

The standard variable rate is set by the bank, and although it may change when Bank Base Rate is increased or decreased there is no requirement for the lender to alter it. It's important to remember this when taking either a variable rate or discount rate mortgage product, your mortgage rate will move up and down as the bank changes its standard variable rate. This may be when the Bank of England Base Rate changes, or due to other factors like a lender deciding to increase its savings interest rate in order to raise more deposits.

Variable rate mortgages are often offered by small buildings societies or as products without early repayment charges, it is also quite common for them to have lower arrangement fees than fixed rate or tracker rate mortgages for example as they usually have a higher payment rate. Previously almost all mortgages were offered on the lenders variable rate however in the current market very few new mortgages are arranged on this type of deal.

Variable rate mortgages tend to be less competitive for those borrowers who are at the outset of their mortgage borrowing and who still have a long term to run on their mortgage repayment, however as borrowers get closer to the end of their mortgage and the costs of moving lender start to outweigh the benefits in costs they may become more competitive however a lifetime tracker could be considered in this instance too or even a long term fixed rate. Borrowers often end up "sitting" on the lenders standard variable for the final few years of the mortgage term as lenders usually have a minimum term for new mortgages of around five years.

The Pros and Cons of Variable Rate Mortgages

Pros:

• Often have no early repayment charges
• May have much lower arrangement costs
• May perform better for borrowers with small outstanding balances

Cons:

• Usually not competitive for borrowers with a significant balance
• Interest rate can be changed by the bank without warning
• No upper limit to potential payments

Other Mortgage Products You May Be Interested In

• Fixed Mortgage Rates
• Tracker Mortgage Rates
• Flexible Mortgage Rates
• Discount Mortgage Rates
• Capped Mortgage Rates
• Offset Mortgage Rates