Variable Rate Mortgages
With a variable rate mortgage repayments go up and down in line with interest rate fluctuations as defined by LIBOR (London InterBank Offered Rate – the interest rate at which Banks in London lend to each other).
Generally, a variable rate mortgage can be a repayment mortgage or an interest only mortgage. The variable mortgage has a rate of interest determined by the lender.
When interest rates change (or when the lender decides) the variable rate will also change. However, if the interest rates change the lender does not have to pass this on to the borrower unlike a tracker mortgage. Our helpful mortgage brokers can offer the best interest rates country wide.
How Do Standard Variable Rate Mortgages Work?
With a standard variable rate mortgage (SVR), the lender has the freedom to set and adjust their interest rates at any time. This means that the monthly rate of interest payable on your mortgage can increase or decrease along the way.
Though it is typical for lenders to adjust SVR mortgages in accordance with changes to the Bank of England base rate, there is no formal requirement for them to do so. With an SVR, the lender adjusts interest rates in one direction or another whenever they choose to do so. In order to remain competitive, SVR interest rates are almost always based (to an extent at least) on the Bank of England base rate.
How Long Does a Standard Variable Rate Mortgage Deal Last?
An SVR mortgage is a full-term mortgage, which means that the terms of the loan and the monthly interest policies of the lender will apply until the loan is fully repaid. It also means that there are fewer restrictions and no lock-in periods imposed, allowing borrowers to switch to more competitive deals at any time.
It is usually possible to switch from a standard variable rate mortgage to a more competitive deal (where one is available) without facing the early repayment charges.
Most lenders automatically switch borrowers to standard variable rate mortgages when their initial fixed or tracker deal comes to an end. This is usually the perfect time to consider remortgaging to a more competitive deal, as standard variable rate mortgages typically attach much higher rates of interest.
It is also important to note that as interest rates on an SVR mortgage can increase at any time, it can be difficult to calculate your exact outgoings on a long-term basis. Some months and years could prove more expensive than others, though it is perfectly possible for an SVR to fall and reduce your monthly outgoings.
Advantages of a Standard Variable Rate Mortgage
The most attractive benefits of taking out a variable-rate mortgage are as follows:
- Initial arrangement and setup fees can be lower than those of a tracker or fixed-rate deal.
- Early repayment is usually possible at any time without incurring penalties.
- An SVR can decrease at any time and significantly reduce your monthly repayments.
Disadvantages of a Standard Variable Rate Mortgage
The following should be considered before submitting an application:
- Your lender has the freedom to increase your monthly interest rate at any time and by any amount, which could make your mortgage payments less affordable.
- It can be difficult to budget long-term with a variable rate mortgage which is prone to change at any moment.
- Standard variable rate mortgages rarely attach the most attractive interest rates on the market, though there are exceptions to the rule.
Ensuring you get the best possible deal on your mortgage means considering as many options as possible from established lenders across the UK. At UK Property Finance, we provide a whole of market comparison service for residential and commercial mortgage applicants from all backgrounds.