Approaching the end of your fixed-rate deal or just curious about what else is out there in the mortgage world? You might have heard about variable-rate mortgages, but what exactly are they, and could they actually work for you?

Finding the right mortgage can feel overwhelming. That’s why we’ve created this easy-to-understand guide. We’ll break down how these mortgages work, loan types, and the kinds of borrowers they suit best. 

Whether you’re a first-time buyer or an existing homeowner evaluating your options, we’ll help you understand how a variable interest mortgage can meet your financial goals.

What Is a Variable Rate Mortgage?

A variable-rate mortgage is a home loan where the interest rate can change over time based on market factors. Unlike a fixed interest rate mortgage, where the rate stays constant, variable mortgage interest fluctuates. 

A reputable mortgage lender shouldn’t change your rate without proper justification. Lenders typically adjust rates following a material change in market or rate conditions (your loan agreement should have clauses covering this). 

Variable mortgage deals often have a slightly lower initial interest rate than fixed types. They’re more flexible, and you generally aren’t required to pay a fee if you redeem your loan early. Additionally, if interest falls, you benefit from lower monthly repayments. 

How Do Variable Rate Mortgages Work?

Interest rates on a variable mortgage are usually tied to the lender’s standard variable rate (SVR) (default interest rate). Lenders set their standard variable rate mortgage based on factors such as:

• The Bank of England base (BoE) rate
• The lender’s risk and lending policies
• Competition in the market
• Wider economic influences

When you sign a variable interest mortgage, you effectively agree that your instalments (and interest) can go up or down during the loan term. This can result in lower payments at times, but it also carries the risk of increased instalments.

Types of Variable Interest Mortgages

There are different types of variable-rate mortgage products to consider, which generally depend on the lender’s flexibility and the deals they might offer. 

Here are the most popular types of current variable mortgage deals: 

• SVR mortgages: This is the most common arrangement. The SVR is set by the lender and fluctuates with market conditions.
• Discounted rate mortgages: This is a type of variable rate where you get a discount off the lender’s SVR for a set period. After this initial period, the rate usually reverts to the standard SVR.
• Tracker rate mortgages: A tracker mortgage usually follows the Bank of England base rate, which offers more transparency. Many property owners and other borrowers keenly tune into BoE announcements about rate changes to see how their repayments are affected.

The Pros and Cons of Variable Interest Rate Mortgages

Here’s a breakdown of the benefits and drawbacks of fluctuating interest loans. 

The benefits of variable-rate mortgages

• Lower initial rates: Variable rate deals are often cheaper upfront than fixed-rate mortgages. This is because the lender can more easily adjust their pricing if their borrowing costs rise. 
• Greater flexibility: A variable home loan offers greater flexibility. There are also fewer restrictions and costs when repaying your mortgage early. 
• Potential savings: If interest rates decrease during the loan term, your mortgage repayments drop, too.

The drawbacks of variable-rate mortgages

• Budgeting uncertainty: Fluctuations make it harder to predict monthly payments. It also might become more challenging to manage your budget confidently.
• Risk of rate hikes: If interest rates rise, your monthly mortgage payments increase. This can place strain on an already tightly stretched budget.
• Higher loan cost: In an environment of continuously increasing rates, a variable-interest loan may cost you more in the long run.

Is a Variable Rate Mortgage Right for You?

A fluctuating interest loan might be ideal for one homeowner but entirely wrong for the next. Before signing up for a variable rate, here are important questions to consider:

• Are you planning to move soon? A variable loan is typically best for a family envisaging a move well before the mortgage deal ends. 
• Are you comfortable with payment fluctuations? If operating a stable monthly budget is important to you, rate changes can be challenging. In this case, a fixed-rate loan may be better.
• Are you financially flexible? Is there headroom in your monthly budget to accommodate increased home loan costs? If so, you can effectively manage the main risk. 

Specifically, variable-rate mortgages can work well for buyers expecting an interest rate fall or those planning to sell or refinance in the short to medium term.

Get Expert Advice on the Best Mortgage

Curious if a variable mortgage is right for you? It all comes down to your individual circumstances and financial aspirations. 

Flagstone provides expert, tailored mortgage advice designed specifically for you. Wherever you are in your property adventure, our team is ready to offer guidance. 

Being the leading mortgage introducer in Essex gives us a real insight into the UK’s mortgage rate fluctuations and the ever-changing rates. We compare options from across the market to secure the most competitive deals for our clients.

Ready to get smarter rates and great deals? Reach out for a no-pressure consultation and let us present you with mortgage offers that could save you money and secure your future.