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Variable Rate Mortgages FAQ
What are the different types of variable rate mortgage?
Variable rate mortgages come in the form of 'tracker' and 'standard rate' variable mortgages. While tracker mortgages follow the Bank of England base rate for interest, standard rate variable mortgages can be changed by the lender according to their conditions of the loan.
There are also discounted versions of standard variable, and tracker mortgages. Often, these mortgages include a discount on the current rate that lasts for a specific period. For instance, you might get a 1% discount over the first five years of your mortgage repayment plan.
What is a standard variable rate mortgage?
A standard variable rate mortgage or SVR mortgage is a type of variable rate mortgage that follows the default interest rate of your chosen lender, without any discounts or limited-term deals attached. When a discount, tracker, or fixed mortgage term ends, you will usually be transferred automatically onto the lender's SVR.
What is a 'mortgage collar'?
A mortgage collar sets a minimum on how low your variable rate will go. This often fixes the base rate amount on a mortgage to ensure that even if the Bank of England base rate falls below the collar, you will stay pay extra. A 'mortgage rate minimum' is similar, but it's set against the standard interest rate, rather than the base rate.
What are the risks of standard variable rate mortgages?
Paying into a standard rate variable mortgage can be a risky strategy, as there is no interest rate security. Lenders can increase their SVR at any time, and if you're on a tight budget, then you might be in a vulnerable position with repayments. Switching onto a fixed-rate deal may offer you more security.
What is a tracker mortgage?
A tracker mortgage is a form of variable rate mortgage that follows the base rate for interest set by the Bank of England. This means that your rate of interest on repayments will change according to UK rates as the Bank raises or lowers its base rate. Usually, however, a mortgage lender will charge slightly more than the base rate. A discount tracker mortgage, on the other hand, removes a percentage point or two from the standard variable rate (not the Bank of England base rate), for a certain period.
What are the risks of tracker mortgages?
A tracker mortgage, like any kind of variable mortgage, will not provide you with total security over your interest rate. If the Bank of England base rate changes, then the interest you pay will change too. If you need to know exactly how much your monthly mortgage repayments are going to be, a tracker mortgage might not be your best option. Instead, you may be better off considering a fixed-rate mortgage deal.
What are discounted Variable Rate mortgages?
Discounts can be given on variable rate mortgages that are like introductory offers. You will pay interest at a rate that is one or two per cent lower from the standard variable, or standard tracker rate. Usually, these discounts last for a period of one to five years.
Should I switch from my fixed rate mortgage deal?
If you're currently in a fixed-rate mortgage deal, you may find that it's worth considering switching into one with a variable rate, particularly when the variable interest rates available to you are extremely low.
Deciding whether to switch to a variable rate mortgage will mean considering whether you think it's worth paying any early repayment fees required for exiting your current mortgage, alongside new arrangement fees, to access a new deal.