For many people, buying a home is the biggest financial commitment they will ever make. Mortgages are complex and require careful consideration before making a decision. Among the most important decisions is whether to choose a variable rate or a fixed rate mortgage. 

While fixed rate mortgages offer a sense of stability and predictability, variable rate mortgages offer greater flexibility and, in some cases, lower costs. In this article, we will explore the benefits of variable rate mortgages.

What is a variable rate mortgage?

A variable rate mortgage, as the name suggests, has an interest rate that can go up or down over the life of the mortgage. Unlike a fixed rate mortgage, where the interest rate remains the same for the duration of the loan, a variable rate mortgage is subject to changes in the wider economic environment. 

The interest rate on a variable mortgage is usually linked to a benchmark rate, such as the Bank of England base rate. When the benchmark rate goes up, the interest rate on the mortgage also goes up, and when the benchmark rate goes down, the interest rate on the mortgage also goes down.

What are the benefits of variable rate mortgages?

No exit/early repayment fees

One of the benefits of a variable rate mortgage is that there are often no fees for early repayment or exit fees. This means that if you decide to pay off your mortgage early, you won’t be charged a penalty. This can be especially advantageous if you have a windfall, such as an inheritance or a bonus from work, and you want to pay off your mortgage early. With a fixed rate mortgage, you may be charged a penalty for early repayment, which can be a significant amount of money.

Usually has a lower initial rate

Another advantage of a variable rate mortgage is that because you’re taking on the risk that the interest rate might rise in the future, your lender will reward you with an initially lower rate. This lower rate can be an attractive proposition for those looking to reduce their monthly mortgage payments. In some cases, the interest rate on a variable rate mortgage can be significantly lower than a fixed rate mortgage, which can save you a considerable amount of money in interest over the life of the mortgage, provided mortgage rates don’t rise significantly during that time.

You will benefit if the base rate goes down

One of the main benefits of a variable rate mortgage is that if interest rates go down, you will benefit. With a fixed rate mortgage, your monthly payments are fixed for the duration of the loan, so you won’t benefit from any reductions in interest rates. However, with a variable rate mortgage, if the interest rate goes down, your monthly payments will also go down. This can be especially advantageous in times of economic uncertainty, when interest rates are expected to fall. 

However, it’s important to remember that a variable rate mortgage could also turn out to be really expensive. If interest rates rise, your monthly payments could increase, making it more difficult to manage your finances. This is why it’s important to consider your personal circumstances and your appetite for risk before choosing a variable rate mortgage.

Can sometimes be a better short-term option

In addition to the benefits outlined above, variable rate mortgages can be a good choice for those who don’t plan to stay in their home for a long time. If you plan to sell your home within a few years, a variable rate mortgage can be a better option than a fixed rate mortgage. This is because you won’t be tied into a fixed rate for a long period, and you may be able to take advantage of lower interest rates in the meantime.

Types of variable interest rate

The two main types of variable interest rate are the standard variable rate and a tracker rate. The standard variable rate is fixed by your lender, who can increase or decrease it at any point, with most tweaking their standard variable rate to reflect changes in the Bank of England’s base rate. This means that if the base rate goes up, your mortgage interest rate will also go up, and if the base rate goes down, your mortgage interest rate will also go down.

A tracker rate, on the other hand, follows the movements of another interest rate, usually the Bank of England’s base rate. So, if the base rate goes down, the tracker rate goes down too, and if the base rate goes up, the tracker rate goes up. Tracker rates can be advantageous in times of economic uncertainty, as they offer greater flexibility and can be cheaper than a fixed rate mortgage. However, it’s important to remember that a tracker rate can also be more expensive than a fixed rate mortgage if interest rates rise significantly.

In conclusion, there are a number of benefits of variable rate mortgages for those who are willing to take on more risk in exchange for greater flexibility and lower initial interest rates. With a variable rate mortgage, you can benefit from lower interest rates if they go down, but you may also face higher payments if they go up. It’s important to consider your personal circumstances and your appetite for risk before making a decision. If you’re unsure, it’s always a good idea to seek professional advice from a mortgage broker who can find you the best possible deal on your mortgage.