What are the advantages of a variable rate mortgage deals?
If your mortgage rate is variable and the Bank of England base rate drops and you have chosen a mortgage linked to the BoE base rate (a tracker mortgage), your interest rate will drop as well and you could find yourself paying very low monthly payments during this time. So, if you foresee a long period of low base rate, you might decide it is sensible to choose a variable rate mortgage which takes advantage of this trend.
What are the disadvantages of a variable rate mortgage deals?
If the base rate suddenly increases and you have a variable rate mortgage, this can have a huge affect on your monthly bills. While all variable rate mortgages tend to be linked to the base rate, if you choose a variable rate mortgage where the interest rate follows the bank’s standard variable rate (SVR), you may not even benefit when the base rate goes down, as the bank does not have to pass on those savings.
What other types of variable rate mortgages are there?
Tracker mortgage deals usually keep a margin above the base rate for a set period of time (say, 1, 2 or 5 years), after which you can normally remortgage without incurring any penalties. But lifetime trackers keep their margin above the base rate for the whole length of the mortgage. Lifetime trackers are therefore useful if you don’t want to have to remortgage every few years. There are also discounted mortgages, which tend to offer an interest rate which tracks the lender’s SVR at a discount of 1 or 2 per cent for a set period of time.
Should I choose a variable rate mortgage?
If you can afford to risk fluctuating monthly payments then a variable rate mortgage may be a good option. While a fixed rate mortgage offers protection from a rising base rate, you usually pay for that protection with higher monthly payments on average, meaning variable rate mortgage deals usually cost less overall. However, if you are on a tight monthly budget, remember that failing to pay monthly mortgage repayments can lead to your home being repossessed, so a variable rate mortgage should not be taken on lightly.
How do I know which variable rate mortgage to choose?
There are so many types of variable rate mortgage that it can be difficult to know where to start your research. The market is also changing all the time, so speaking to a mortgage advisor can help to unravel the many options you have. For initial research you can compare mortgages online and use a mortgage calculator to work out the potential monthly payments, this will help you get an idea of the market before looking into it more closely.
David P Walker
Credit Choices offers free price comparisons and advice on mortgage deals, including NatWest mortgages and Santander mortgages, for homeowners and first time buyers.View all articles by David P Walker
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