For many people differentiating between the various kinds of mortgages available to them can be pretty daunting. That being so we would like to offer our help, and here we will concentrate on the ‘variable rate mortgage‘ and explain in simple terms what it is and how it can work for you.
A variable rate mortgage, as you might expect from the description, is one that can vary from month to month. This is because the interest you pay is usually based on the Bank of England rate of interest, which tends to fluctuate. Therefore, when the base rate rises or falls, then variable rates tend to do the same. For example, if the base rate rises by, say, 0.25% then so will most variable rate mortgages.
That is the easy part. The complication arises because there are different types of variable rate mortgages. One of them is the Standard variable rate mortgage, or SVR, which usually applies to a mortgage that has reached the end of a fixed period. In this case the rate of interest on a mortgage is almost always a few percentage points above the Bank of England rate.
You may also be able to take out a Discount mortgage, whereby the interest rate is based on the SVR, but is discounted for the first couple of years. These tend to be popular with first-time buyers because, obviously, they cost less during the discounted period. In such cases, however, an arrangement fee and an early repayment charge may apply.
The main advantage of the so-called Tracker mortgage is that when the base rate is low the tracker rate will reflect it. However, when the base rate is high, the tracker rate will also be high. A plus is that with this type of mortgage there are no early repayment charges so you can make large repayments as and when it suits you. With a Capped mortgage you will find that there is a limit as to how high the interest rate can go, so you will be better able to budget for any increase on your monthly repayments.
When trying to decide which of these types of variable rate mortgage is best for you here are certain facts which need to be taken into account. One of them is flexibility. If you would like the opportunity to make early repayments or larger monthly payments than required, then the tracker or SVR will suit you most. Interest rates are obviously a key factor. If you are of the opinion that interest rates will rise then it would seem judicious to go for a fixed rate for the next few years. On the other hand, if you feel that there will be a tendency for interest rates to fall during that fixed period then a variable rate mortgage is more prudent.
Finally, if you have the financial capacity to cope with any increases in interest rates, then a variable mortgage will probably be more cost effective and will undoubtedly offer greater flexibility.