Variable Rate Mortgages
As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments.
Standard Variable Rate
The interest rate used here is the lender’s default rate, their Standard Variable Rate (SVR). As the name suggests, the rate applied can change at any time, meaning that your monthly repayments could do so too.
With this type of product there isn’t usually an early repayment charge with your lender, so you can move to another type of mortgage at any time and can potentially overpay your mortgage to pay it off faster and shorten the term. However, variable rate mortgages can potentially change if the Bank of England base rate rises or falls, making it harder to budget for your repayments. There can often be better and more cost-effective deals available in the marketplace.
A tracker mortgage is a type of variable rate mortgage which tracks a nominated interest rate, usually the Bank of England base rate. The actual mortgage rate you pay will be a set interest rate above or below the rate tracked. When the rate tracked goes up, your mortgage rate will go up by the same amount. And it will come down when the rate tracked comes down.
A Discount rate is a type of variable rate mortgage where the interest rate is set at a discount below a rate of interest, typically the lender’s Standard Variable Rate (SVR) for an initial period of time, typically two or three years.
The obvious benefit here is that the rate is lower, so your repayments will be cheaper. However, if interest rates rise, you can expect your repayments to increase too. You also need to be aware that lenders have differing SVRs, so you may need help in working out which discount deal is most suitable and most cost-effective option for you.
A type of variable rate mortgage, but these have an interest rate ceiling, or cap, beyond which your payments can’t rise. The interest rate is often higher than that available on other variable and fixed rate mortgages and the cap can be set quite high. However, it provides the certainty that your payments will not rise above a certain level.
A capped rate is normally only available for an introductory period, which can typically be from two to five years.
This type of mortgage may also have a minimum rate of interest that the lender will charge for a specified period. This is referred to as a ‘collar’.