A variable rate mortgage is where the interest rate can change based on fluctuations in the Bank of England’s base interest rate or the lender’s variable rate. This means the borrower’s monthly mortgage payments can increase or decrease depending on how the interest rates change.

There are two types of Variable rate mortgages, tracker and standard variable rate (SVR).

Tracker mortgages are linked to the Bank of England’s base interest rate; the interest rate charged by the lender is a set percentage above this rate. Suppose the base rate goes up or down. For example, if the base rate is 0.5% and the tracker rate is set at 1%, the borrower will pay an interest rate of 1.5%. In that case, the borrower’s interest rate and monthly mortgage payments will also increase or decrease accordingly.

SVR mortgages, however, are set by the lender and can change at any time. The lender usually has a standard variable rate higher than the base rate. If the base rate increases, the lender may increase their variable speed. As a result, the borrower’s interest rate and monthly mortgage payments will also increase.

Variable-rate mortgages offer borrowers flexibility and the potential to benefit from lower interest rates if they decrease. However, the interest rate uncertainty can make it more challenging to plan and budget for mortgage payments.

Your home may be repossessed if you do not keep up repayments on your mortgage

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The information contained within was correct at the time of publication but is subject to change.