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Variable-rate mortgages

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Author
Atousa Cunnell
Editor
James Andrews
Last updated
December 1st, 2023
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What is a variable-rate mortgage?

With a variable rate mortgage, the amount of interest you’re charged can go up and down, so your repayments may be different each month.

They work differently to fixed-rate mortgages, where your interest charge is guaranteed to stay the same for a defined period of time.

There are three main types of variable rate mortgage: 

  • Standard variable rates (SVRs) – SVRs are set by the mortgage provider, and they decide how and when to change them

  • Discounted rates – these are also set by the lender, and are based on a specific discount on another rate, usually their usual SVR

  • Tracker rates – they are usually linked to the Bank of England’s base rate and any rise or fall in that rate will have a knock on effect on your interest charges.

What is SVR?

SVR stands for standard variable rate. This is set by your mortgage lender, and different companies will have different rates, each choosing to put them up or down based on a number of factors.

They are not directly linked to the Bank of England’s base rate, but are still likely to be influenced by any changes to it.

Other factors that might lead to your provider changing your interest rate could be if their cost of borrowing changes, due to regulatory changes or because of internal business targets.

If you took out a fixed, discount or tracker deal, once it comes to an end, you are automatically switched onto the lender’s SVR, unless you choose to remortgage.

Often the SVR is the most expensive option available, but there are benefits to them, such as flexibility to change mortgages at any time and the ability to overpay.

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What are the advantages and disadvantages of SVR mortgages?

No penalties if you overpay - with an SVR, you can pay off as much as you like fee-free. This is useful if you want to use spare cash to pay off your mortgage more quickly.
No early exit fees - the vast majority of other mortgages, especially fixed-rate deals, will charge you if you choose to remortgage before the end of the agreed fixed term.
Typically lower than fixed rates - due to increased financial uncertainty that your monthly repayments could increase significantly.
Expensive - over the lifetime of a mortgage, you can pay thousands of pounds more than you need to in interest fees.
Unpredictable - it can be very hard to predict what your future mortgage repayments might be.

What are the different types of variable-rate mortgages?

Tracker mortgages

Tracker mortgages are linked to an economic indicator such as the Bank of England base rate. As the indicator goes up and down, your mortgage interest rate will follow it. This can therefore be slightly easier to predict than other variable rates, as the Bank of England’s base rate changes are well-publicised. 

Often the rate is a specific percentage over the indicator, for instance, it could be the base rate plus a set percentage. Most tracker mortgage deals last between two to five years, but you can find longer offers.

Longer tracker rate deals may come with a collar or cap, but caps are very rare. A collar (or floor) is a set rate that your mortgage interest rate will not fall below. This means that if the Bank of England base rate (or other financial indicator) falls to 0, but your deal is capped at 0.5%, then you will still have to pay 0.5%. 

A cap (or ceiling) is a guarantee that your mortgage will never rise above the defined amount, regardless of what happens to the financial indicator it’s following. For this reason, they are very rare, but also not as competitive as tracker rates without a cap, as they are riskier for the lender.

SVR mortgages

Each lender sets its own standard variable rate (SVR) for mortgages, which is typically between 2% and 5% above the Bank of England’s base rate.

However, the SVR is set at the lender’s discretion and can go up or down at any time for a number of reasons.

This type of mortgage can be very expensive and, importantly, this is the rate most borrowers will be put on when a mortgage deal ends.

However, the SVR does offer a lot of flexibility with no early repayment charges (ERCs). For this reason, it can sometimes make sense to remain on the SVR for a short period of time – if you're planning to move home soon, for example.

Discount rate mortgages

Discount variable-rate mortgages set an interest rate that is a specific percentage less than the lender’s SVR. For example, a lender offering a 1% discount on its SVR of 5%, would charge 4% to the borrower.

The interest rate will go up and down when the lender’s SVR does, but you will keep the same percentage discount on whatever their new rate is. This means your monthly repayments will change too. Deals are usually for a set period of between two and five years, but you can get lifetime discount mortgages.

Tracker mortgages

Tracker mortgages are linked to an economic indicator such as the Bank of England base rate. As the indicator goes up and down, your mortgage interest rate will follow it. This can therefore be slightly easier to predict than other variable rates, as the Bank of England’s base rate changes are well-publicised. 

Often the rate is a specific percentage over the indicator, for instance, it could be the base rate plus a set percentage. Most tracker mortgage deals last between two to five years, but you can find longer offers.

Longer tracker rate deals may come with a collar or cap, but caps are very rare. A collar (or floor) is a set rate that your mortgage interest rate will not fall below. This means that if the Bank of England base rate (or other financial indicator) falls to 0, but your deal is capped at 0.5%, then you will still have to pay 0.5%. 

A cap (or ceiling) is a guarantee that your mortgage will never rise above the defined amount, regardless of what happens to the financial indicator it’s following. For this reason, they are very rare, but also not as competitive as tracker rates without a cap, as they are riskier for the lender.

SVR mortgages

Each lender sets its own standard variable rate (SVR) for mortgages, which is typically between 2% and 5% above the Bank of England’s base rate.

However, the SVR is set at the lender’s discretion and can go up or down at any time for a number of reasons.

This type of mortgage can be very expensive and, importantly, this is the rate most borrowers will be put on when a mortgage deal ends.

However, the SVR does offer a lot of flexibility with no early repayment charges (ERCs). For this reason, it can sometimes make sense to remain on the SVR for a short period of time – if you're planning to move home soon, for example.

Discount rate mortgages

Discount variable-rate mortgages set an interest rate that is a specific percentage less than the lender’s SVR. For example, a lender offering a 1% discount on its SVR of 5%, would charge 4% to the borrower.

The interest rate will go up and down when the lender’s SVR does, but you will keep the same percentage discount on whatever their new rate is. This means your monthly repayments will change too. Deals are usually for a set period of between two and five years, but you can get lifetime discount mortgages.


What is the difference between variable rates and fixed rates?

With a variable-rate mortgage, your interest rate can go up and down over time and your monthly repayments will change too. A fixed-rate mortgage guarantees a set interest rate for a fixed period. This means your repayments stay the same. 

The interest rates on fixed term deals are typically more expensive than variable rate deals, as you’re paying for the security of knowing that your payments won’t increase if your lender’s variable rate rises.

What is the longest variable rate available?

If you chose to, you could remain on the lender’s SVR indefinitely until the mortgage is paid off, however, that is not usually the cheapest option. Discount variable rate and tracker rate mortgage deals typically range from two to five years, but can also be extended to the entire mortgage term, if preferred. 

Given the length of the average mortgage term (25 to 30 years) this is not typically recommended, as interest rates will almost certainly rise over time. 

Speak to a mortgage adviser if you are unsure what mortgage type is right for you. They will be able to help you calculate the most appropriate deal for your circumstances.

“Watch out for any floors (or collars) with variable-rate mortgages, as they can minimise the savings you make if your rate drops. On the other hand, a cap (or ceiling) is the maximum limit of how high an interest rate can rise and can help offer a peace of mind.”
Author image
Atousa Cunnell
Content producer

Variable-rate mortgage FAQs

What happens when my variable rate mortgage deal ends?

If your tracker or discount mortgage deal ends you will be automatically moved to your lender's standard variable rate. This means your repayments will go up if the SVR is higher than your offer rate. You can choose to shop around and switch to another deal, which should keep your costs lower.

Can I pay off my variable rate mortgage before the term ends?

If you’re on the SVR, you can pay off your mortgage fee-free. If you have a tracker or discount mortgage, most providers charge you if you repay or switch to a cheaper deal before the term ends. However, people on lifetime tracker deals usually escape early repayment charges.

How do discount variable-rate mortgages work?

These are charged at a discount on the SVR. For instance, your lender could offer you a deal that is 1% or 2% lower than their SVR. When they change the SVR, your repayments will change too, but with the discount still intact. Usually, these deals last between one and five years, but some have longer terms.

What are mortgage collars and mortgage caps?

A mortgage collar, also known as a “floor” means that the rate will never fall below a certain level. For instance, if your tracker mortgage follows the base rate, the lender might say that the interest rate will never drop below 0.25% – even if the base rate drops to that level. 

A mortgage cap is the opposite and means that your interest rate will never rise above a certain level, even if other financial indicators do. Caps are far rarer than floors.

About the author

Author imageAtousa Cunnell
Atousa Cunnell
Atousa is a Content Producer for money.co.uk, responsible for writing and editing a wide range of mortgage content that are helpful to the reader.

money.co.uk is not a mortgage intermediary and makes introductions to Mojo Mortgages to provide mortgage solutions.

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