Are you looking for an alternative mortgage? Looking for flexibility and potentially lower interest rates? Then, you might want to consider a variable-rate mortgage. This type of loan can be an attractive option for borrowers who are willing to take on some risk in exchange for potential savings. In this blog post, we’ll explore what exactly a variable rate mortgage is, how it works, and discuss the current standard variable rate. We’ll also delve into different types of variable-rate mortgages and help you understand which one may be right for you. So, let’s dive in and uncover the world of variable rate mortgages together!
What is a Variable Rate Mortgage?
A variable rate mortgage, also known as an adjustable-rate mortgage (ARM), is a type of home loan where the interest rate can change over time. Unlike a fixed-rate mortgage, which has a set interest rate for the entire duration of the loan, a variable rate mortgage offers more flexibility.
A variable mortgage’s interest rate is typically tied to an index, such as the prime lending rate or the London Interbank Offered Rate (LIBOR). These indexes fluctuate based on market conditions and can cause your monthly payments to go up or down.
One advantage of a variable rate mortgage is that it often starts with an initial period of lower interest rates compared to fixed-rate mortgages. This means you could potentially save money in those early years. However, it’s important to keep in mind that once this initial period ends, your interest rates may increase.
It’s crucial for borrowers considering a variable rate mortgage to understand how their monthly payments may change over time. While there is potential for savings if market conditions favour lower rates, there is also risk involved if rates start to rise significantly.
How a Variable Rate Mortgage Works?
An adjustable rate mortgage (ARM), commonly referred to as a variable rate mortgage (VRM), is a kind of mortgage in which the interest rate changes over time. Unlike a fixed-rate mortgage, which has a set interest rate for the entire term of the loan, a variable rate mortgage offers flexibility and can provide both advantages and disadvantages to borrowers.
So how does it work? Instead of having a static interest rate throughout your loan term, the interest rates for variable-rate mortgages are based on an index such as the Bank of England Base Rate or LIBOR. These indexes reflect changes in overall market conditions. When these indexes change, so does your mortgage interest rate.
The frequency at which your interest rate adjusts can vary depending on the terms of your specific mortgage agreement. It could be annually, semi-annually, or even monthly. This means that if market conditions improve and interest rates decrease, you could benefit from lower monthly payments. However, if rates rise, you may see an increase in your monthly payment amount.
It’s important to note that most variable rate mortgages have certain limits called caps and floors to protect borrowers from extreme fluctuations in their monthly payments. Caps limit how much the interest rates can increase during each adjustment period, while floors prevent them from dropping too low.
What is the Current Standard Variable Rate?
The current standard variable rate (SVR) is the interest rate a lender charges on a mortgage loan. Unlike fixed-rate mortgages, where the interest rate remains constant for a set period of time, SVRs can fluctuate based on changes in the financial market. As of August 2023, the current standard variable rate is 7.25%.
The SVR is typically influenced by factors such as base rates set by central banks, general economic conditions, and competition among lenders. It serves as a benchmark for variable rate mortgages and can vary from one lender to another.
It’s important to note that borrowers who have completed their initial fixed or discounted rate period often revert to the lender’s SVR if they do not remortgage or switch to another deal. This means that their monthly mortgage payments may increase or decrease depending on any changes in the SVR.
While some borrowers may opt for an SVR mortgage due to its flexibility and lack of early repayment charges, others prefer more stability with fixed-rate options. Understanding and keeping track of the current standard variable rate is crucial when considering your mortgage options.
Types of Variable Rate Mortgages
When it comes to variable rate mortgages, there are various options available to borrowers. Each type has its own unique features and benefits, allowing homeowners to choose the one that best suits their financial goals and circumstances.
- Standard Variable Rate Mortgages
- Discounted Variable Rate Mortgage
- Tracker Rate Mortgage
Each variable rate mortgage type has pros and cons, depending on your circumstances and risk tolerance level as a borrower.
Standard Variable Rate Mortgages
Standard Variable Rate Mortgages, also known as SVR mortgages, are a type of variable rate mortgage offered by lenders. Unlike other variable-rate mortgages with specific introductory periods, SVR mortgages do not have any set term or fixed interest rate period.
The interest rate on an SVR mortgage can fluctuate at the discretion of the lender and is typically based on changes in the Bank of England’s base rate. This means that if the base rate increases or decreases, your monthly mortgage payments may also change.
SVR mortgages offer flexibility to borrowers as there are usually no early repayment charges or penalties for making extra repayments. However, because the interest rates can be higher than other types of mortgages available in the market, it’s important to regularly review and compare options to ensure you’re getting a competitive deal.
Discounted Variable Rate Mortgage
What is a Discounted Variable Rate Mortgage? A discounted rate mortgage is a type of loan where the interest rate is based on the lender’s standard variable rate but with a discount applied for a certain period of time. This means that your monthly mortgage payment will fluctuate along with changes in the base rate but at a reduced percentage.
How does it work? Let’s say that the lender’s standard variable rate is 5%, and you are offered a 1% discount for the first two years. This means that your interest rate would be 4% during this initial period. However, after this discount period ends, your interest rate will revert back to the lender’s standard variable rate.
The length of the discount period can vary depending on the specific terms of each mortgage agreement. Some may offer discounts for only one or two years, while others may have longer periods, such as five or even ten years.
Tracker Rate Mortgage
A tracker rate mortgage is another variable rate mortgage tied to a specific financial index, usually the Bank of England’s base rate. With this type of mortgage, the interest rate will fluctuate in line with changes in the chosen index. For example, if the base rate increases by 0.25%, your tracker rate would also increase by the same amount.
One advantage of a tracker rate mortgage is that it offers transparency and predictability. Since the interest rates are directly linked to an external index, borrowers can easily anticipate how their monthly payments will be affected when market changes occur.
However, it’s important to note that tracker mortgages often come with certain terms and conditions. Some lenders may impose a minimum or maximum interest cap on these types of loans, which means your interest rates won’t drop below or rise above a certain level, even if the underlying index experiences significant fluctuations.
Which is Better Fixed or Variable Rate Mortgage?
When it comes to choosing between a fixed or variable rate mortgage, there isn’t a one-size-fits-all answer. It ultimately depends on your individual financial situation and personal preferences.
A fixed-rate mortgage provides stability because the interest rate will not change during the life of the loan. This can be advantageous if you prefer predictable monthly payments and want to avoid any potential future interest rate hikes. However, it’s important to note that fixed rates tend to be slightly higher than initial variable rates.
On the other hand, a variable rate mortgage often starts with a lower interest rate that fluctuates over time based on market conditions. While this means your monthly payments may change, it also allows for the possibility of taking advantage of reduced rates when they occur.
To determine which option is better for you, consider factors such as how long you plan to stay in your home, your risk tolerance, and whether you have the financial flexibility to handle potential payment increases with a variable rate mortgage.
Ultimately, the choice between a fixed or variable rate mortgage depends on your financial goals, comfort level with risk, and the current interest rate environment. It’s advisable to consult with a mortgage specialist or financial advisor to determine which option is best suited for your specific needs.
Conclusion
Variable rate mortgages offer many advantages for homeowners, including the potential to save money on their mortgage payments. However, borrowers should be aware of the risks that come with a variable rate mortgage and understand how it works before deciding if this is the right choice for them. Knowing the current standard variable rate can also help you make an informed decision when considering a variable rate mortgage. With so much information available online about mortgages and their rates, researching and comparing different types of mortgages can help you find one that best suits your financial needs.
