A variable rate mortgage tends to be most lenders’ “standard product”. As the name suggests the rate varies during the term of the mortgage.
The rate is usually calculated based on the Bank of England base rate plus a percentage. So if the base rate is 1.25% the lender may add an additional 3% giving a variable rate of 4.25%.
Usually, standard variable rates are higher than fixed rate or tracker rate mortgages. They also change more frequently, which can mean it is difficult to keep a tight rein on your finances.
When mortgage rates are on the rise, as they are right now, it can often be more prudent to choose a fixed or tracker rate, to lock in the mortgage payments for a period of time. You can feel like this is a gamble but looking at recent history and speaking to an independent mortgage adviser can help you make the right choice for you.
So, if variable rates are higher, why would you choose one?
It can deliver a great short term solution if you are planning to move house. If you have sold your house, or are getting ready to do so, it can offer you a holding position while you make the arrangements to move.
Sometimes lenders are not prepared to transfer a mortgage from one property to another. That means you need to pay off your existing mortgage and start a new one for your new property. A variable rate mortgage offers you that flexibility, usually without any penalty clauses.
Some variable rate mortgages don’t have arrangement fees either, but it is important that you check the small print with the lender you are considering. Every lender is different.
As always, it is important that you do your sums before deciding. Just because a tracker or fixed rate mortgage looks like a more cost effective option – with cheaper monthly payments – doesn’t mean it is the best option. If you include arrangement fees, penalty fees etc, sometimes the saving is negligible, and can be more expensive.
Our advice is always to seek professional guidance before signing on the dotted line, considering your future plans rather than just the situation you are in now.
If you would like advice on your mortgage, please contact us on 01344 875 310.