All About Variable Rate Mortgages

Variable rate mortgages have an interest rate that may fluctuate throughout the term of the loan. Interest rates attached to variable rate mortgages usually move in line with either the Bank of England Base Rate (BoEBR) or the lender’s Standard Variable Rate (SVR) and is quoted as a fixed percentage above one of them. An example of this is a variable rate home loan with an interest rate equalling BoEBR plus 0.25%.

Fixed rate mortgages, on the other hand, have a static rate of interest that is locked in for an agreed period of time. Changes in the base rate or the lenders SVR will not affect the interest rate attached to this type of home loan making this type of product less risky to the borrower as their monthly mortgage payments will not increase

Capped rate mortgages have an inbuilt upper limit above which the interest rate on the product cannot rise even if the base rate rises above this limit. Capped rate mortgages therefore offer the borrower protection against excessive base rate rises while still offering the advantage of saving money through potential decreases in the base rate.

Unlike fixed rate mortgages, variable rate mortgages offer borrowers no protection against interest rate rises and are therefore risky. The amount of monthly repayments due can both rise and fall throughout the term of the mortgage therefore making variable rate mortgages unsuitable for householders who have a tight budget.

Despite this risk, variable rate mortgages do have some advantages. During periods of traditionally high interest rates many borrowers opt for variable rate mortgages if they are expecting the cost of borrowing to fall. This is because any fall in the underlying interest rate will be passed onto them by their lender, resulting in a decrease in their monthly mortgage payments.

Additionally, variable rate mortgages have less stringent terms and conditions than their fixed rate counterparts, and are usually offered with low fees and no tie-in periods. It is essential to assess the fees and charges attached to home loans before applying instead of opting for the product that appears to have the most favourable interest rate structure. This is because the cost of the fees may outweigh the benefits of the interest rates – whether they are fixed or variable.