Although fixed rate mortgage deals remain popular with UK consumers, many will use variable interest rate options as an alternative. These mortgages can potentially work out cheaper in some circumstances. What are variable rate mortgages and what are the advantages and disadvantages of this kind of deal?
What is a Variable Rate Mortgage Loan?
A mortgage deal that comes with a variable interest rate will have monthly repayments that may change over time. These mortgages are tied to a lender or bank base rate. If this rate rises, then payments go up; if it drops, then they go down. A fixed interest option, on the other hand, will come with set payments that will not change over the term of the deal.
At a basic level these mortgages are tied into a lender's Standard Variable Rate (SVR). This rate will be connected to an underlying bank base rate. Taking an SVR deal is not necessarily the best option, however, as each lender is likely to offer variable deals at lower rates.
What are the Advantages of Variable Mortgage Rates?
Any kind of mortgage deal comes with benefits and downsides. The primary advantages of taking a variable rate include:
- If interest rates go down then homeowners can take advantage of lower repayment costs.
- There are a variety of variable rate deals on offer to suit various circumstances/preferences.
- These products may be given lower interest rates than fixed rate mortgages.
Before considering taking out a variable rate deal, however, it is worth looking at possible downsides.
The Disadvantages of Variable Rate Mortgages
Although there is a lot of choice in variable rate deals, these may not suit every homeowner. Some of the potential disadvantages include:
- If lender/bank interest rates rise then payments will go up.
- Locking into a special deal will involve a fee.
- Opting out of a deal early may result in penalty charges.
It is important to think hard about different options in the mortgage sector as a whole before coming to a decision. If interest rates look likely to increase then a fixed rate deal may be more cost effective than a variable rate offer. If they look likely to drop then the opposite may hold true.
Those considering a new mortgage deal may also find it useful to:
- Consider the pros and cons of a fixed rate deal.
- Look at a middle ground option with a hybrid fixed/variable mortgage or a tracker with a cap.
- Research the types of deals available to them to check on potential savings/payment costs.
- Think about whether to take out a repayment or interest only loan.
- Use a mortgage calculator to assess how deals compare in terms of charges and costs.
Carol Finch - Carol Finch is the Topic Editor for Retirement Planning, Budgeting, E-Commerce & Technical/Business Writing on Suite101.
Join the Conversation