As their name implies, variable rate mortgages don’t have a fixed repayment structure. Therefore, as the underlying lending rate changes, so too will a variable rate mortgage. In the UK, the underlying lending rate that affects all sorts of borrowing from credit cards to mortgages and personal loans is set by the Bank of England. If their committee decides to lower interest rates, then mortgage lenders will usually follow suit within a month or so and lower their variable mortgage rates. The result?
Borrowers with variable mortgages will see a smaller monthly repayment they need to make to stay on track with their mortgage debt.
However, Bank of England lending rates can go up, as well. If so, this is when variable mortgages can start to be more expensive. Many people who have them saw an upturn in the sums their mortgage lenders were charging them in 2022 and some analysts predict that further hikes in the underlying lending rate could happen if inflation continues to be a concern in the British economy.
That’s one reason why some borrowers prefer to take out a fixed-rate mortgage instead. If mortgage rates go up, then they won’t be adversely affected until the term of their deal comes to an end. Conversely, they won’t benefit if the Bank of England rate starts to fall.
Therefore, like many things to do with mortgages and house price valuations, there is an element of risk involved whichever sort of mortgage you opt for. This is why it is often best to shop around so you can see all of the mortgage deals out there before deciding which is the right one for you.
According to Pinnacle Finance, specialist lending brokers based in London, this can be particularly useful if you have an uneven income, perhaps because you are on performance-related pay or are self-employed.
The fact is, though, that deciding whether or not to take out a variable rate mortgage will depend on your view of how the economy will shape up in the next few years. If inflation falls, then mortgage rates could feasibly follow. If so, maybe sticking with a variable rate mortgage deal would be good for now.
You can always switch to a fixed-rate deal down the line, often with the same lender. There again, if the Bank of England rate goes up and you want to fix your payments for five or six years, then it will only become more expensive to do so.
Remember that there isn’t just one variable rate mortgage deal either. Different lenders will offer differing rates and compete with one another regardless of what the underlying rate happens to be. Standard variable rate mortgages aren’t the only option if you are taking out a new mortgage or your current deal has come to an end.
Consider tracker rate mortgages, too. These are a form of variable rate mortgage that move when the Bank of England rate does without any delay. Discounted mortgage deals are also on offer. These have variable rates but come with a discount of a set percentage for a fixed period. Talk to your financial advisor or broker for more personalized advice.