What is a variable rate mortgage?
In contrast to fixed-rate mortgages, variable-rate mortgages have interest rates that can fluctuate each month.
As a result, your mortgage repayments will adjust accordingly. Generally, there are two main types of variable-rate mortgages.
Tracker
The interest rate is typically set at a fixed margin above the Bank of England (BoE) base rate.
Your mortgage repayments will rise and fall in line with any changes to this base rate. It's important to be aware of this, as you need to prepare for potential rate hikes that could increase your monthly payments to uncomfortable levels.
Standard Variable
Standard variable rate (SVR) mortgages are similar to tracker mortgages in that they are subject to fluctuations over time.
However, unlike tracker mortgages, SVRs do not follow the Bank of England (BoE) base rate. Instead, they are tied to the lender's own standard variable rate, which the lender controls. Some borrowers prefer to align with the BoE base rate for greater transparency in rate changes, as it offers more predictability compared to the lender's SVR.
Should I go for a variable rate or fixed rate mortgage?
With interest rates on the decline, there are some attractive variable rate mortgage deals available.
If you're comfortable with the uncertainty of fluctuating monthly payments, a variable rate mortgage could be a good option. However, if you prefer more certainty for budgeting purposes, a fixed-rate mortgage might be a better choice.