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Guide to variable rate and discount mortgages

Variable rate mortgages

Variable rate mortgages are based on the standard variable rate offered by mortgage lenders.

How do mortgage lenders decide on their standard variable rates (SVRs)?

Mortgage lenders set their standard variable rate depending on the movement of the Bank of England base rate.

The level at which the standard variable rate is set varies between different lenders. With the base rate at 0.5%, Britain's biggest lenders' SVRs are currently around 3.99%.

However, don't assume lenders automatically shift their mortgage rates in line with base rate: If you want a rate that is guaranteed to move in line with the base rate, you need a tracker mortgage.

What are the advantages of variable rate mortgages?

Usually, you won't have any tie-in penalties with a variable rate mortgage - so if you want the flexibility, they are ideal.

They also work well as a stop-gap - in other words, if you're not sure whether you want a fixed rate but want some breathing space to decide, a variable rate will work well.

And usually, it's easy to overpay on a variable rate deal - this is a good way to cut down the term and total interest on a loan.

Finally, even though there are no guarantees, if you've got a variable rate deal it should move down if the base rate falls. However, don't expect it to mirror the exact size of any fall.

What are the potential problems with variable rate mortgages?

If the base rate rises, it's likely the SVR will too, increasing your repayments. If you're a first time buyer on a tight budget, this could be disastrous: The certainty of a fixed rate is better if you would struggle if rates went up.  

Discount mortgages

These allow you to get a discount off the standard variable or tracker rate for however long the discount lasts.

For example, you might be offered a one percentage point discount off the lender's standard variable rate for two or three years.

With a discounted rate, you know that if your lender's standard variable mortgage rate rises or falls, your repayments will echo those moves - minus the discount off the rate you're getting.

Like a fixed rate mortgage, if you want to get out of the loan during the special offer period then you will be charged a penalty. However, discount deals often don't have arrangement charges.

Discounted deals are less popular these days than they were, mainly because they've largely been superseded by tracker deals.

If you have a tracker mortgage, you know your interest rate has to move in line with base rate. With a discount mortgage, you know you'll pay a discount off the SVR but you have no promise that the SVR will move up or down with the base rate.

With discounted deals, you do need to check what the underlying SVR is. Some lenders have much higher SVRs than others, and there's no point in getting a discount off a rate that will still be too high.

How do I find a variable rate or discount mortgage deal?

For more information about the variable rate and discount mortgages currently on offer, use our mortgage enquiry form below and get free advice from a specialist mortgage advisor.

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