When sitting down to try and work out what type of contractor mortgage will suit you it is important to ensure you know the ins and outs of all the different products you will encounter. Variable rate mortgages are very common and consequently it is essential that you understand what they do, how they work and what they will mean for your long-term financial plans.
Variable rate mortgages are mortgages in which the interest rate can change at anytime throughout the duration of the loan. When national interest rates set by the Bank of England rise and fall the interest rate of your lenders products will also rise and fall and in turn, so will your mortgage. Additionally, there are a number of different types of variable rate mortgage to choose from (all of which are discussed in more detail elsewhere on this site) including Tracker Rate Mortgages (which are set at a level just above the standard base rate and then track that base rate), Discounted Rate Mortgages (which are similar to fixed rates and which agree to a certain period at a discounted rate from the standard variable rate), and Capped Rates which also stick to the standard variable rate but which have a cap on how high that rate can go for a year or two).
Why would someone opt for a standard variable rate mortgage over a fixed rate? Firstly because a lot of people wouldn’t want to tie themselves to a fixed rate if rates were high. Secondly because when rates are high lenders will often choose to swallow rate rises into the cost of the mortgage repayment. Thirdly because variable rate mortgages are cheaper to set up and fourthly, because variable rate mortgages leave you free to overpay, make early repayments and do not charge you if you wish to change lender.
The Disadvantages of Standard Variable Rate Mortgages
There are of course some disadvantages too. Firstly, a variable rate mortgage does not offer any of the security of a fixed rate mortgage. If you sign up for a variable rate and then interest rates shoot up you will find your repayments rising significantly. This could lead to financial problems for you at a later stage. Also, your lender may choose to add their own increases on top of the base rate if they want to increase their own profits.
Variable rate mortgages are worth considering then if rates are high and you don’t want to fix in to repayments at that level or if you want a cheaper mortgage and / or know you will be making early repayments.