What are Variable Rate Mortgages?
If you’re applying for a mortgage, the likelihood is that you’re having a whole host of mortgage deals thrown at you, by hundreds of different lenders. It can be a bit overwhelming, can’t it? Luckily, we’re going to show how one of the most popular options, a variable rate mortgage, may be the right option for you.
For those of you who don’t know, a variable rate mortgage is a type of mortgage where the interest rate is not fixed. This basically means that banks or building societies can provide borrowers with a variable rate mortgage for the entirety of the mortgage term. Let’s find out more about what they involve.
What are the details of a variable rate mortgage?
While variable rate mortgages can last for the whole mortgage term, depending on the structuring of your mortgage deal, this may not always be the case. For example, you may find yourself on your lenders Standard Variable Rate at the end of an introductory deal. This can also be done in the form of an adjustable rate mortgage (more on that later) and different types of standard variable mortgage deals.
We would recommend going for a variable rate mortgage if you predict that interest rates may decrease in the future, although because a variable rate movement is controlled by the lender it doesn't have to mirror the Bank of England or LIBOR movement. If this is what you are trying to achieve then best opt for a Tracker Mortgage. Confused, contact one of our MO advisers who can talk you through your options.
What causes variable rate mortgages to fluctuate?
A lot of lenders also like to base variable rate mortgages on a fully indexed rate. This is basically an interest rate which is tied to a benchmark that can affect rate changes. For example, interest rates are based around the base rate which is set by the Bank of England. If this increases then this means that so will interest rates. The same goes for if they decrease. However, as mentioned in the previous paragraph, your lender decides the size of the movement. For instance, the Bank of England may reduce their base rate by 0.25% but your lender may decide to reduce your interest rate by 0.1%. This doesn't seem to be the case when rates increase or is that just me being cynical !!!
Different types of variable rate mortgages
- Full-term variable rate mortgages
This is pretty self-explanatory. This means that the borrowers will be charged a variable rate for the entirety of their mortgage term. Though remember, as the interest rate that you are on will be an indexed rate this can mean that it may fluctuate at any point during the loan. The positives of this are that you will have less to pay when the rates decrease. However, on the flipside, if the rates increase then so will the amount that you have to pay.
This can seem daunting for a lot of buyers regardless of their experience as it can leave you uncertain of how much you may have to pay over a long period of time. But don’t worry readers, this is where we step in. At Mortgages Online we can compare a wide variety of mortgages from multiple lenders to help you find the best deal. If you feel worried about fluctuating interest rates, then maybe have a look at fixed rate mortgages.
With fixed rate mortgages, it’s important to bear in mind that they are unlikely to last for your whole mortgage term and instead typically last up to five years (however, each lender varies). But most importantly, they can be a great way to stabilise your finances in the early stages of your homeownership. This means that regardless of how the indexed rate changes, the interest on your property will be fixed for however long you have this deal for. This leads us nicely on to adjustable rate mortgages.
Should I go for a standard variable rate mortgage?
The truth is there’s no uniform answer to a question like this. It all depends on your personal situation and your finances when you’re deciding which mortgage to go for. While a standard variable rate mortgage tends to be at a higher rate than what's available as a Tracker mortgage often a standard variable rate comes without overpayment limitations. If you are thinking of making overpayments in excess of 10% per annum or you feel you may have the opportunity to redeem your mortgage in full & don't want to be tied in to any Early Repayment Charges then a Standard Variable Mortgage may be the correct choice for you.
While we know that unless you have a crystal ball, predicting future market trends with a degree of certainty won’t be easy. And with mortgages being a long-term commitment you might feel backed into a corner. This is where we step-in...
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