Variable Rate Mortgages
Each mortgage provider will offer a variety of variable rate mortgages which are based on the lender's variable rate. This standard variable rate or SVR is based on the Bank of England base lending rate which is a figure that may fluctuate each month. When the Bank of England base rate rises mortgage companies tend to increase their variable rate in-line with the increase. Alternatively when the Bank of England base lending rate drops mortgage companies pass on the saving to their customers by reducing their SRV. This in turn means you cannot predict the cost of your mortgage repayments as some months you may pay less than you budgeted for and other months more.
What are the benefits of a variable rate mortgage?
The benefit of a variable rate mortgage come when the Bank of England base rate falls, borrowers tend to pay less. They also have the freedom to change their mortgage provider at any time without the worry of a redemption penalty.
What are the disadvantages of a variable rate mortgage?
If the Bank of England base rate rises it will most likely result in an increase in your lenders standard variable rate. In turn when there is a decrease in the BoE base rate the saving is not always passed on by lenders to their customers. This in turn makes it very difficult to budget as you cannot predict what your repayment will be from month to month.
How much will this affect you? If we use an example of the Bank of England raising the cost of borrowing by 1.25% we can show exactly how it would affect mortgage repayments. The average new home owner will borrow around £150,000 for their first home. If they had a variable rate mortgage then the increase in their monthly repayments will result in them having to paying an extra £156 more a month. For some this kind of rate increase would be too much to handle, so make sure you keep an eye on the UK economy and be ready to move to a different mortgage type if need be.