A variable-rate mortgage has an interest rate that can go up or down. This means your repayments could change throughout the course of your mortgage. A variable-rate mortgage might be cheaper than a fixed-rate one initially but could end up being more expensive overall.
Variable-rate options include discounted and tracker mortgages, as well as standard variable rate (SVR) mortgages.
Tracker mortgages
A tracker mortgage tracks the Bank of England base rate by a set amount. For example, you might get a tracker mortgage that is set to track at two percentage points above the base rate.
This means when the base rate rises or falls, your interest rate will rise or fall with it at two percentage points. So for example, if the base rate rises to 3%*, you pay interest at 5%.
* for demonstration purposes only, the UK base rate is currently 5%
Discounted mortgages
A discounted mortgage offers an interest rate at a set amount below the lender's standard variable rate (SVR).
This means it will fall and rise with your lender's SVR, but will remain the set amount cheaper throughout your initial deal. This discount can be in place for a fixed period or for the lifetime of the mortgage.
Kirsty Lacey, Mortgage Expert at Mojo Mortgages, said:
“It’s important to understand the difference between a discounted rate and a fixed rate mortgage. While a discounted rate often appears cheaper at first, this is a variable rate so it’s subject to change throughout your deal, meaning it could increase or decrease at any time.
A fixed rate deal might seem more expensive at first, but you’ll have peace of mind that your payments won’t increase during the length of your deal.”
Standard variable rate (SVR) mortgages
If you have a fixed, discounted or tracker mortgage that is coming to the end of its initial period, you will move onto your lender’s SVR.
This will usually be more expensive, as you'll be paying the lender's default rate, by your lender. If you don’t want to move onto your lender's SVR after your initial deal ends, you should consider remortgaging to a new deal.
Being on an SVR does offer a greater amount of flexibility than some other deals, with no ERCs to pay, which might be helpful if you're planning to move soon. However, you can sometimes get other deals (such as tracker mortgages) that offer no ERCs which may offer better rates. A broker can help you find the right deal for your and your circumstances.