A variable rate mortgage is a mortgage where the interest rate can move up or down.
That means your monthly repayment can change during the mortgage deal, depending on how the rate is structured and what happens to wider interest rates.
For buyers, this can offer more flexibility in some situations, but it also creates less certainty. If the rate rises, your monthly repayment may increase. If the rate falls, your payment may be reduced.
Variable rate mortgage key takeaways
- A variable rate mortgage can move up or down
- Your monthly repayment can change during the deal
- Payments may rise if the rate increases
- Payments may fall if the rate decreases
- Variable rates can offer flexibility, but they may be harder to budget around
What a variable rate mortgage is
A variable rate mortgage is a mortgage where the interest rate is not fixed for a set period.
Instead, the rate can change. That means your monthly repayment can also change if the lender’s rate or the wider rate environment moves.
This is what makes a variable rate different from a fixed rate mortgage. With a fixed rate, your monthly repayment stays the same during the fixed period. With a variable rate, the monthly payment can move.
How variable rate payments can change
A variable rate mortgage can move up or down over time. When the interest rate changes, your monthly repayment may change too.
If the rate rises, your payment may increase. If the rate falls, your payment may decrease.
How much your payment changes depends on:
- mortgage balance
- interest rate
- mortgage term
- type of variable rate
- whether the mortgage is repayment or interest-only
This is why it helps to leave more breathing room in your budget with a variable rate mortgage.
Example: £250,000 repayment mortgage over 30 years
Interest rate
Estimated monthly payments
What it shows
5%
£1,342
Starting point
6%
£1,499
Payment increase if the rate rises
4.5%
£1,267
Payment decreases if the rate falls
Example figures are for illustration only.
What this means: A variable rate can move in either direction. Before choosing one, it helps to consider whether your budget could cope if payments increased.
Types of variable rate mortgage
Variable rate mortgages can work in different ways, depending on the product.
01 Standard variable rate
A standard variable rate, often shortened to SVR, is the lender’s own variable rate.
Borrowers often move onto this rate when a fixed or tracker deal ends, unless they arrange a new mortgage deal.
02 Tracker rate
A tracker rate usually follows an external rate, such as the Bank of England base rate, plus a set margin.
If the tracked rate rises or falls, the mortgage rate and monthly repayment may change.
03 Discounted variable rate
A discounted variable rate is usually set below the lender’s standard variable rate for a set period.
For example, the lender may offer a discount from its SVR. However, if the SVR changes, your payment can still move up or down.
What to weigh up with a variable rate mortgage
A variable rate can offer flexibility, but it also means your monthly repayment may change. The right choice depends on how comfortable you are with payment movement and whether you could manage higher monthly costs if rates rise.
Why buyers choose variable rates
Variable rates may appeal to buyers who want flexibility or who are comfortable with payments changing.
Some variable deals may have lower or fewer early repayment charges than fixed rate deals, although this varies by lender and product.
Variable rates may also be attractive if you think rates could fall, but there is no guarantee this will happen.
What to consider before choosing a variable rate
The main trade-off is uncertainty.
If rates rise, your monthly repayment may increase. This can make budgeting harder, especially if you prefer predictable payments.
You should also check whether the deal includes early repayment charges, how often the rate can change, and what the rate is linked to.
Need help comparing variable and fixed rates?
Speak with Muttuo Mortgages today.
How variable rates work in practice
A buyer has a variable rate mortgage.
If the mortgage rate rises from 5% to 6%, the monthly repayment may increase. If the rate falls from 5% to 4.5%, the monthly repayment may be reduced.
This can make a variable rate feel more flexible, but also less predictable than a fixed rate.
What this means: A variable rate can move in either direction. Before choosing one, it helps to know whether your budget could cope if payments increased.
What buyers often misunderstand about variable rates
Variable rate mortgages can be useful, but there are a few points buyers often misunderstand.
Variable does not always mean cheaper
A variable rate may look competitive at first, but it can increase later.
This means the monthly payment could become more expensive than expected if rates move against you.
Payments can change more than once
A variable rate can change multiple times, depending on the product and lender.
This means your monthly repayment may not just change once. It could move several times during the period you hold the mortgage.
Not all variable rates work the same way
A tracker rate, discounted rate, and standard variable rate can all behave differently.
Before choosing a variable deal, it helps to understand what the rate is linked to and how changes are applied.
How to make sense of variable rate mortgages
A variable rate mortgage may suit buyers who are comfortable with payment movement and want more flexibility.
However, it can be harder to budget around because monthly repayments can change if the rate moves. That makes it important to understand how the rate works, what it is linked to, and whether your budget could cope if payments increased.
The key is to compare the flexibility against the uncertainty, rather than looking at the starting rate alone.
Need help with your mortgage?
Speak with Muttuo Mortgages today.
