Variable-Rate Mortgages Explained

Choosing your mortgage doesn’t have to feel like a maze. Whether you’re moving to a bigger house, buying your first home, or investing in property, there’s definitely a mortgage out there for you. 

Could a variable-rate mortgage be the one? Find out how they work and explore all the pros and cons, so you can make the right choice that suits what you need.

What Is a Variable-Rate Mortgage?

A variable-rate mortgage is a home loan where the interest rate can change over time. Unlike fixed-rate mortgages, which lock in a rate for a set period, variable-rate mortgages move with the market. If rates go up, so do your repayments. If they drop, you pay less.

Most lenders offer variable-rate mortgage terms between two and five years. In the case of a standard variable rate (SVR) mortgage, there is no set term limit, meaning you’re free to move on to a more competitive (lower) rate deal at any time. 

How Does a Variable-Rate Mortgage Work?

Your interest rate – and monthly repayments – will fluctuate depending on the lender’s standard variable rate (SVR) or the Bank of England base rate. If interest rates fall, you could save money. But if they rise, your mortgage will cost you more.

Variable-rate mortgages can be great if you’re happy to ride the wave of interest rate changes. But if you prefer certainty, a fixed-rate mortgage might be a better fit.

Types of Variable-Rate Mortgages

There are four main types of variable-rate mortgages. Here’s what you need to know:

Tracker-Rate Mortgages

Tracker mortgages follow the Bank of England base rate plus a set percentage. For example, if the base rate is 4% and your tracker mortgage is set at base rate +1%, you’ll pay 5%. But, if the base rate were to increase by 0.5%, the rate you pay would also increase by the same amount. 

Why choose it?

• Transparent pricing – no surprises

• You benefit if the base rate drops

• Your repayments increase if rates rise

Discounted-Rate Mortgages

These types of mortgage-rate deals offer a discount on the lender’s SVR for a set period, like two or five years. So, for example, a lender could offer you a 2.5% discount for a 2-year term on an SVR of 7%, meaning your mortgage rate would be 4.5% during that period. 

Why choose it?

• Lower repayments during the discount period

• Cheaper than SVR mortgages

• If the lender reduces their SVR, your payments will also come down

Capped-Rate Mortgages

Like a tracker or SVR mortgage, but with a maximum cap so your interest rate won’t go above a set level.

Why choose it?

• Provides protection against steep rate hikes

• If rates drop, your payments can too

Standard Variable Rate (SVR) Mortgages

This is the default rate you move onto when your mortgage deal ends. It’s set by your lender and not directly linked to the Bank of England base rate.

Why choose it?

• No early repayment charges – you can switch to a more competitive rate deal whenever you want

• No limits on overpayments, meaning you can make as many additional payments as you wish at any time

Variable-Rate vs Fixed-Rate Mortgages

Repayments for variable-rate mortgages can go up or down depending on the lender’s standard variable rate (SVR) or the Bank of England base rate. With fixed-rate mortgages, the interest rate remains the same throughout the term, meaning your repayments will also not change. 

So, on this basis, a good time to take out a variable-rate deal rather than a fixed-rate deal could be when interest rates are set for a downward trend. As the base rate or lender SVR comes down, so will your repayments. 

However, bear in mind that there are no guarantees on how long a cycle of reducing interest rates would last before they begin increasing once again. 

What Are the Pros and Cons?

Variable-rate mortgages can be a solid option during periods when market rates are expected to come down. But there’s always the risk that rates - and, therefore, your repayments - will increase. 

Why They’re Great

• Can be cheaper overall - particularly during sustained periods of decreasing interest rates

• More flexibility – Usually variable-rates have fewer early repayment fees and allow for larger overpayments

What to Look Out For

• Uncertainty – Payments can increase unexpectedly

• Harder to budget – Rates can change at any time

• Higher risk – If interest rates soar, so do your repayments