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TheMoveChannel.com | Variable Rate Mortgages

Introduction

A variable rate mortgage is one that reacts to changes in the Bank of England base rate, or some other index that is used as a benchmark. As such, the majority of all interest rates can be broadly classed as variable rate mortgages.

However, when people talk about variable rate mortgages, most are referring to products that charge a particular lender's Standard Variable Rate (SVR) of interest.

The SVR is the rate of interest upon which most other products on offer from a particular lender are based. More often than not, a lender's SVR is itself linked to the Bank of England base rate, though it is usually set at a level of the base rate plus a certain number of percentage points. When the base rate changes, the lender reacts by making a corresponding increase or decrease to its own SVR, though not all lenders will alter their SVR immediately every time the base rate changes, or necessarily by exactly the same amount.

Certain mortgages will require the borrower to pay the lender's SVR on the full balance of a mortgage from the outset. Others will revert to the SVR on completion of the introductory fixed, discounted, or other form of offer period.

Advantages

SVR mortgages are more widely available than any other type of rate. Borrowers looking for adverse credit, buy to let, let to buy, self-build, 100%, cashback or self-certification mortgages may find that they do not meet the lending criteria that would enable them to take out some of the more competitive offers available on the market. The sheer volume of mainstream and specialist lenders offering SVR products means that they are more likely to be able to find this type of mortgage.

SVR mortgages usually offer virtually unrestricted movement, particularly when a customer is paying the SVR having previously been on some form of introductory offer. Most customers of this type will be able to move to another mortgage product or a different lender without fear of being hit with redemption penalties. However, this is not always the case, as some products have redemption penalties that last beyond the offer period or that are payable for an extended period of time due to particularly relaxed lending criteria, cashback deals, or some other reason.

Disadvantages

Although this type of mortgage is the most common type of rate in this country, it is certainly not a type of product that is suitable for everyone to take out at the start of a mortgage term. Unless it is associated with a flexible mortgage, or some other form of specialist product, most borrowers will find that fixed or discounted deals usually offer far more attractive rates. Furthermore, SVR mortgages offer unpredictable levels of monthly repayments, which do not allow new homeowners to accurately budget for their repayments.

However, if you eventually want to pay your mortgage off and avoid remortgaging forever, it is inevitable that you are going to have to content yourself with paying a lender's SVR at some point in the future. So if you are looking for a long-term deal, it is important to make sure that your lender has a good track record of offering a competitive Standard Variable Rate.