Variable Rate Mortgage
What is a variable rate mortgage?
The advantages of a variable rate mortgage is that it allows the borrower to shift from a standard variable rate mortgage to another mortgage with no type of early redemption fee. Also if the Bank of England base rate falls, the mortgage payment may also fall.
Standard Variable Rate
Variable rate mortgages are based on the standard variable rate offered by mortgage lenders and mortgage lenders set their standard variable rate depending on the movement of the Bank of England base rate. The level at which the standard variable rate is set varies between different lenders but a standard guideline is between 1.5% and 3.5% over and above Bank of England base rate.
Are they stable and what are the risks?
Variable rate mortgages can save you money over your mortgage lifespan but you need to remember that your payments will go up and down depending on the financial market. The potential danger with variable rate mortgages is a large increase in Bank of England base interest rates and a subsequent increase in the lender’s standard variable rate. The ability for mortgage borrowers to budget is also reduced and if interest rates slide, lenders do not have to pass this down to borrowers.
Maybe a fixed mortgage?
Because of this your monthly payments can go up and down and if you want to pay a fixed amount each month then you should go for a fixed rate mortgage. Also in most cases when your deal ends your interest rate will switch to the standard variable mortgage rate which may be higher or lower than the rate you have been paying and may vary over the remaining term of your mortgage.
Standard Variable Rate
What is a standard variable rate mortgage?
A Standard Variable Rate Mortgage is based on the standard variable rate (SVR) which is the basic interest rate on which a Lender bases all of its mortgage deals.
How expensive is this type of mortgage?
The average lending rate is usually about 2% above the Bank of England's base lending rate but can be higher depending on the Lender.
Is this a good way to borrow money?
A Standard Variable Rate Mortgage is a very expensive way to borrow money as its usually at the Lender's highest rate, when you could choose a cheaper fixed interest or discounted variable rate mortgage.
How does the interest change overtime?
Depending on the interest rates, if these go up then the Lender will immediately increase your monthly payments, and there is actually no restrictions on how much they can be increased by.
Alternatively, if interest rates go down then so will your monthly payments but this is not usually so prompt. In an unstable market this could prove to be costly so its worth considering other options which offer better rates.
If you have a poor credit rating then you may find that your Lender will offer a higher rate as they are taking much more of a risk, and this could prove a very expensive way of obtaining a mortgage, so its essential to shop around.
As this mortgage is expensive, why do people choose it?
You may also be unaware that when your initial offer or special deal on a mortgage finishes, around 2 to 5 years, your mortgage will automatically switch to a standard variable rate mortgage so its worth re-mortgaging a couple of months before this happens and get a better deal unless you are tied into this, so its important to check this at the beginning of any mortgage offer and also if there are any redemption charges if you switch to another deal.