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Beginners Guide

Variable Rate

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What are the different types?

There are two main types of mortgages:

  • Fixed rate: The interest you’re charged stays the same for a number of years, typically between two to five years.
  • Variable rate: The interest you pay can change.

Fixed Rate

The interest rate you pay will stay the same throughout the length of the deal no matter what happens to interest rates.

You’ll see them advertised as ‘two-year fix’ or ‘five-year fix’, for example, along with the interest rate charged for that period.


Variable Rates

Variable rate mortgages

With variable rate mortgages, the interest rate can change at any time. Make sure you have some savings set aside so that you can afford an increase in your payments if rates do rise.

Variable rate mortgages come in various forms:

01. Standard variable rate (SVR)

This is the normal interest rate your mortgage lender charges homebuyers and it will last as long as your mortgage or until you take out another mortgage deal.
Changes in the interest rate might occur after a rise or fall in the base rate set by the Bank of England.

02. Discount mortgages

This is a discount off the lender’s standard variable rate (SVR) and only applies for a certain length of time, typically two or three years.
But it pays to shop around. SVRs differ across lenders, so don’t assume that the bigger the discount, the lower the interest rate.

03. Tracker mortgages

Tracker mortgages move directly in line with another interest rate – normally the Bank of England’s base rate plus a few percent.
So if the base rate goes up by 0.5%, your rate will go up by the same amount.
Usually they have a short life, typically two to five years, though some lenders offer trackers which last for the life of your mortgage or until you switch to another deal.

04. Capped rate mortgages

Your rate moves in line normally with the lender’s SVR. But the cap means the rate can’t rise above a certain level.

04. Offset mortgages

These work by linking your savings and current account to your mortgage so that you only pay interest on the difference.

You still repay your mortgage every month as usual, but your savings act as an overpayment which helps to clear your mortgage early.

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