Variable Rate Mortgages: Ten Things You Need To Know
Variable Rate Mortgages: Ten Things You Need To Know
If you're thinking about getting a variable rate mortgage here are ten things you should consider:
1. Variable rate mortgages are either linked to your lender's standard variable rate (SVR) (which in turn is linked to the Bank of England's base rate) or else directly to the Bank of England's base rate. Mortgages which are linked directly to the base rate are called tracker mortgages, i.e. they track the base rate.
2. The level at which lenders set there SVR is generally some two to three percent above the base rate. But there is no hard and fast rule.
3. Any changes made to the base rate or to your lender's SVR will cause the rate of your mortgage to fluctuate. When rates go up your monthly payments will rise and when they go down your payments will drop.
4. A variable rate mortgage which is linked to the lender's SVR will not necessarily move completely in line with the Bank of England's interest rate. For example, if the base interest rate is cut by 0.25 percent you may find that your mortgage rate is only cut by say 0.22 percent, so the lender has not passed on the cut in full.
5. Tracker mortgages will generally follow changes to the base interest rate. If the base rate falls by 0.25 percent then your mortgage interest payments should also fall by 0.25 per cent.
6. Discounted variable rate mortgages are linked to the lender's SVR but will come with a discount for a set period of time. For example, you could have discount of 1.5 percent off the SVR (usually for a period of between 6 months and 3 years). When the discounted period ends the interest rate on your loan would then just revert to the SVR.
7. Base rate tracker mortgage are commonly called tracker mortgages. Any changes made to the Bank of England base rate will be copied by this mortgage. Your lender will generally charge a fixed rate above the base somewhere in the region of between one and four percent.
8. Lifetime tracker mortgages are a type of variable rate mortgage which tracks the base rate for the life of the mortgage.
9. Variable rate mortgages, on the whole, have lower fees and no tie-in periods (unless you have a discounted variable rate) than other types of mortgage.
10. Variable rate mortgages can offer more flexibility than other mortgages as they usually come with the option of making overpayments - making an overpayment of 100 pounds a month on a life of the mortgage could reduce the length of an average mortgage by five or six years and save thousands in interest!
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