Variable rate mortgage

Which type of variable rate mortgage is best?

The best variable rate mortgage for you depends on your individual circumstances and your appetite for risk, so it's a good idea to review this information and discuss at greater length with a mortgage expert, before making a final decision.

Standard variable rate mortgages

Every lender has a standard variable rate (SVR), which is their default interest rate and usually higher than other rates. When you take out any other type of mortgage deal, you'll automatically transfer onto your lender’s SVR once that deal comes to an end - usually after two, three, five or ten years, depending on the term you chose.

How do standard variable rate mortgages work?

Standard variable rates are set by the lender, who also decides and how much to increase or decrease them by, according to UK remortgage statistics, approximately one in seven (14%) of UK mortgages in 2022 were on a variable rate. Although every lender will be influenced by changes in the Bank of England's base rate, SVR (and therefore discount rates) are not directly linked to any external economic indicator. This makes it more difficult to predict when your mortgage repayments may rise or fall.

When might an SVR mortgage be right for me?

SVRs are rarely the cheapest option available to you, although in the current market, it is worth speaking to a broker about this.

In some circumstances, an SVR may be the best or only option - at least in the short term. For example, if you’re unable to qualify for a remortgage at the current time, but the product transfers available with your existing lender won’t save you any money.

They can also be helpful if you’re looking to move home within a short period, as you won’t need to consider ERCs.

Tracker mortgages

Trackers are the only type of variable rate mortgage where rate changes are not entirely in the hands of the lender. They follow what’s known as an external economic indicator - this is usually the Bank of England’s base rate, but can differ on commercial products, which sometimes use SONIA.

Lenders price tracker rates at a percentage (of their choice) above the external indicator they are following. Whenever the indicator rises or falls, the tracker interest moves in line with it.

For example, if the Bank of England base rate is 4%* plus 2%, you would be charged 6%. If the base rate rose to 6%*, you'd pay 8%, as the additional 2% charged by the lender remains the same.

For demonstration only, actual UK base rate is currently .

This makes it slightly easier to predict whether your rates will increase or decrease by keeping up to date with current mortgage news.

Tracker deals have a set length, two-five year terms are most popular, but some are available for the lifetime of the mortgage.

Discount rate mortgages

Discount rate mortgages also have a variable interest rate, but instead of the external economic indicator, it rises and falls in line with the lender's SVR. The lender can change the SVR attached to it at any time - but the percentage of the discount can't change throughout the deal duration.

For example: The SVR is 5% and a discount rate gives you 1% off, so you pay 4%.

If the SVR rises to 6%, however, you keep your 1% discount, but you pay 5%.

Again, these deals most commonly last for two to five years, but are available on a lifetime basis, if preferred.

Disadvantages of variable rate mortgages

The main disadvantage of variable rate mortgages is a bit more general, as they all share in their unpredictability. No matter whether you have a tracker, discount, or SVR, your payments can go up or down at any time. 

Those on a strict budget may prefer to opt for a fixed interest rate product which won't change at all for the length of the deal - so you’ll always know how much your repayments will be. 

SVR and discount rates also have the further disadvantage of being more difficult to predict than a tracker rate. Tracker rates are often the most suitable option for people looking for a variable rate, but wanting slightly more idea of when their rates may change. 

It’s also important to note that tracker rates and discount rates are deals that you're locked into for a set period of time. This could be a disadvantage if your rates suddenly rose considerably and you were unable to pay the ERCs necessary to remortgage.