Variable Rate Mortgages

Variable rate mortgages are standard interest-only or repayment mortgages where the interest rate can change frequently, even each month (although this is rare). Each mortgage lender in the UK has their own 'standard variable rate' (SVR). This is the standard interest rate on which all its mortgages are based. The SVR is set according to the Bank of England's base rate. This rate is decided by the Monetary Policy Committee (MPC), who meet each month. They are essentially responsible, along with the Chancellor of the Exchequer, for economic and financial stability in the UK.

Typically, a lender's SVR is two percent above the Bank of England's base rate. If the base rate is five percent, the typical SVR will be seven percent. If the base rate rises, the SVR will rise too. If the base rate falls, your SVR should fall too. However, some mortgage provider's may choose to maintain their SVR or reduce it at a later date, since they are not obliged to pass on reductions to you. Essentially, if a mortgage lender wishes to attract customers, it will lower its SVR. If it wishes to increase profits, it may maintain a higher SVR.

What if I have a poor credit history?

If you have a poor credit rating, you may decide to choose a lender who specialises in offering poor credit mortgages. These mortgage providers tend to have higher SVRs because the risk of you failing to make repayments on time and in full is greater. For more information see Poor Credit Mortgage.

Obtaining the Best Deal

In most cases, variable rate mortgages do not offer you the best deal. This is because there are a number of cheaper, fixed rate and discounted rate mortgage deals. These offer you a reduced interest rate for a limited period and can reduce the overall cost of your mortgage by thousands of pounds. For example, if you took out a £200,000 interest-only variable rate mortgage for five years and the standard variable rate was seven percent, you would pay £80,510 in interest charges (assuming the rate did not change during this period). If you had taken a fixed rate mortgage for this period at five percent, the interest charges would total £55,256 – a saving of £25,254.