Variable Rate Mortgages

A variable rate mortgage is one that changes when the lender announces interest rate changes. So unlike a Fixed Rate, if the mortgage rate goes up then you will be paying more each month. Equally if it goes down then you pay less.

Advantages

• Your monthly repayments will fall with reductions in interest rates.
• Gives you flexibility.

Disadvantages

• Your repayments will rise with interest rates.
• Does not give give you the ability to budget for repayments.

Tracker Mortgages

These mortgages are a variation of a Variable Rate mortgage. They guarantee to be a certain percentage in excess of the Bank of England base rate in the case of most Tracker mortgages.

So as the Bank of England base rate changes, the Tracker mortgage rate does by the same amount. If the Bank of England base rate were 5% and the Tracker rate guaranteed to be 2% greater, then you would be paying 7%. If the base rate were then to go up 1% to 6%, you would be paying 8% (i.e. new base rate (6%) plus the 2% guarantee).

Advantages

• The interest rate you pay moves immediately that the base rate changes. Lenders rarely pass on changes to borrowers immediately.
• You are guaranteed the percentage rate that your loan will exceed the base rate by. This prevents you from suffering from your Lender becoming uncompetitive with their existing borrowers standard variable rate.

Disadvantages

• You need to make sure you get a competitive guaranteed rate above the base rate and that the base that the lender uses is also competitive as this can, sometimes, be a rate set by the lender rather than using an independent rate such as the Bank of England base rate.
• When rates rise, you are subject to the increase immediately.

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

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