Second Series Variable Rate Mortgage

by Mark Johnston

The different types of mortgages available to UK home buyers. Yesterday we looked at fixed rate mortgages. Lets remember that a fixed rate mortgage remains the same interest rate for a specified length of time this gives the borrower security and financial stability in knowing what mortgage payment they will have each month until the end of the fixed.

Today we will look at variable rate mortgages and lenders standard rate mortgages

What is a variable rate mortgage? This is a mortgage that is ruled by the interest rate whether the interest rates raise or fall this happens along the length of the mortgage term. It is dependant on the mortgage lenders action to what will happen to the borrower’s rate they could decide to increase the rate a little or a lot, cut the rate or not or just do nothing however they will not let the mortgage become uncompetitive.

Borrowers are always watching closely as they may be able to snap up a bargain rate or look for a new lender.

The lenders standard variable rate comes into force when a fixed rate mortgage term has ended. The other variable rate mortgage is known as the tracker due to the fact that it tracks the Bank of England base rate and each time the rate changes the interest rate of the tracker changes either a rate cut or rise.

The Bank of England has a monetary policy committee that decides whether the Bank of England base rate goes up or down, the aim of this is to try and keep inflation at a low and constant level.

In order to better understand variable rate mortgages, here’s an example. If a mortgage lender is offering a mortgage at 1.5% above base rate and the bank of England base rate is currently 0.5%, the borrower would pay a 2% mortgage rate.

A good example of this would be if the mortgage is for £160,000 over a standard twenty five years at two per cent interest the borrower would pay £682 per month

If the mortgage lenders standard variable rate is 1.5 per cent  and the Bank of England base rate increases to 4.5 per cent the borrower would have to pay a massive six per cent interest rate. This would increase the payment to £1043 per month . This scenario just shows that your mortgage payment could increase £361 and this could easily happen.

Its worth remembering that back in May 1989 the Bank of England base rate was 14%

The mortgage lenders standard variable rate used to be two per cent above Bank of England base rate but due to the banking crisis and slashing of the base rate to 0.5 per cent the SVRs standard variable rate is from two per cent to five or six per cent.

Advantages

  • The most competitive standard variable rates tend only to be available to borrowers with a very large deposit or a lot of equity in their property therefore these can be made attractive
  • Borrowers with standard variable rate mortgages can switch mortgage lenders more easily.
  • For people who want to take advantage of the fall in interest rates
  • Good if base rate remains low

Disadvantages

  • Less straightforward for financial budgeting
  • Bad if Bank of England base rate increases sharply

A lenders standard variable rate is usually not the most competitive interest rate they have to offer



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