Variable rate mortgages

Standard variable rate mortgages are loans where the lender’s variable interest rate is used. They can fluctuate and generally follow the direction of the Bank of England's base-rate changes. However, the rate does not necessarily move in equal proportion to the Bank base rate.

A lender’s standard variable mortgage rate is likely to be a certain degree higher than the base rate set by the Bank of England. As lenders almost always offer mortgages with discounted rates and special offers, variable rate mortgages tend to be the most expensive option, but can be good for borrowers when interest rates are coming down.

A good start in finding the best variable rate mortgages is to use a variable rate mortgage calculator on one of the many mortgage comparision websites, and sites offering mortgage deals.

However, mortgage lenders are almost certainly going to be offering better deals than standard variable rate mortgages. These could include fixed-rate mortgages, where the interest is set at a certain level for a specified period, typically two to five years, regardless of whether the lender’s standard variable rate goes up or down over the period.

Another option is the discounted variable-rate mortgage. Here the lender offers a discount off its standard variable rate. This rate could go up or down when the lender's standard variable rate does so.

Another possibility is the capped-rate mortgage, where an upper limit is put in place on the interest rate charged. If the lender's variable rate rises above this limit the borrower’s mortgage is unaffected, and if the lender's rate falls below the level of the borrower’s cap, the borrower benefits by having their interest payments reduced accordingly.

Furthermore, there are tracker-rate mortgages, typically following the base rate with a discount or a premium for a set period of time.

Many mortgage discount deals impose a redemption penalty should you end the mortgage during - or sometimes after - the special offer period. After the special offer period the loan typically reverts to the standard variable rate.

By Ben West