Different types of variable rate mortgages
How mortgage payments are made and how much you pay each month is one
of the most important factors when choosing the right mortgage for
Banks often offer a few variable mortgage rate options, and this
can modify the amount you pay every month, depending on what you
There are a few options available, including standard variable
rate mortgages, tracker mortgages, discount mortgages, offset
mortgages and capped rate mortgages.
Standard variable rate mortgages explained Standard variable rate
mortgages are one of the more common types of mortgages available,
with many of the leading banks and lenders offering at least one.
With a standard variable mortgage, you pay the standard rate of interest
charged by your bank or mortgage provider. This rate changes depending
on the Bank of England’s base rate, and is usually a couple of
percentage points higher than that rate, however each bank sets its
own standard variable interest rate.
The benefit of a standard variable rate mortgage is that you usually
get freedom to overpay or
switch to another mortgage deal at any time. The disadvantage of a
standard variable rate mortgage is that you do not necessarily get
peace of mind regarding how much you pay each month, so it’s not the
ideal option if your income fluctuates month to month or you
absolutely need to budget over the next few years. Your rate can
change at any time, even if the Bank of England’s base rate does not
Capped rate mortgages explained
Much like the standard variable rate mortgages, capped rate mortgages
offer you the bank’s standard variable rate of interest, with one
exception – your rate will have a cap. This ensures that the rate
cannot go above a certain amount.
This sounds like a great plan in theory, but the way mortgage payments work is that you will always
find a catch or an issue that does not always align with your personal
circumstances. One key disadvantage to a capped rate mortgage is that
banks will improve their chances of making a profit by starting off
with a higher than usual standard variable rate, which is normally
higher than others or fixed rate mortgages.
Secondly, caps tend to be
quite high, so it’s unlikely that the Bank of England bank rate will
go above it, and unlikely that another bank’s standard variable rate
would go that high.
Finally, the bank, just like with other standard
variable rate mortgages, is able to adjust the rate at any time. They
can do this up to the cap, so don’t look at the cap as simply a
protection against higher interest repayments, but rather as the
maximum you might have to pay each month.
Discount mortgages explained
Similar to fixed rate mortgages, discount mortgages offer an
introductory deal. The main distinction is that the introductory offer
on a discount mortgage can still be changed during the deal’s term.
discount mortgage is essentially a standard variable rate mortgage
with a discount offered usually for the first two or three years of
the mortgage. It’s important to not only look at how deep the discount
is, but what the overall rate is being offered. Shop around and
compare before deciding on any discount mortgages.
For example, a
mortgage you’re looking at has a standard variable rate of 7%, but for
the first two years of your mortgage you will get a rate of 5%. This
means you get a discount for the first two years, but will have to pay
a higher rate afterwards.
One added benefit is that if the bank or
lender cuts its standard variable rate – this could happen if the Bank
of England base rate falls – then your introductory deal could be even
lower, as would your standard variable rate thereafter.
uncertainty of a standard variable rate mortgage can be a
disadvantage, with rates likely to go up if the bank rate goes up.
Even your introductory discount deal is not at a fixed rate, so that
too could go up at any time.
You should also watch out for charges if
you want to leave during your introductory deal. If you want security
over how much your monthly mortgage payment will be, variable rates
can be difficult to budget with and may not be ideal in such a
Tracker mortgages explained
If you’re unsure about taking on a fixed rate mortgage deal but you’re
still asking yourself, ‘how much will my mortgage payments be?’ then a
tracker mortgage could offer a viable alternative – although you will
need to feel confident about judging the Bank of England’s future
assessments of the economy.
Tracker mortgages are almost exactly like
standard variable rate mortgages, except that the standard rate
provided by the bank will only change in line with the Bank of
England’s rate, and not due to any other circumstances.
variable rate mortgage will usually change according to the Bank of
England’s interest rate, but it can also do so whenever it feels like.
With a tracker mortgage, you are guaranteed that the rate will only
track the rate of the Bank of England.
This rate is usually a little
higher than what the Bank of England’s base rate is, so it will still
be roughly around the same price of a standard variable rate mortgage,
but with the peace of mind that it will only change with the base
Offset mortgages explained
Offset mortgages, or current account mortgages as they’re sometimes
known, link your bank account to your mortgage. If you have savings,
this will go towards the balance of the mortgage, so for example, if
you have £20,000 of savings on a mortgage of £200,000 your balance,
which you will have to repay interest on will be £180,000.
means that you don’t earn any interest on the savings that you have,
but as a result, you wouldn’t pay any interest for the sum of your
savings – in this case £20,000.
Some offset mortgages only link to
your current account, while others link to both your current account
and savings accounts. Offset mortgage interest rates can be on fixed
rate deals or a range of variable rate offers too.