Variable Rate Mortgage
A variable-rate mortgage is one whose interest rate goes up and down over time. Some variable-rate mortgages, often known as tracker mortgages, can change whenever the Bank of England’s base interest rate changes. As is the case with most variable-rate mortgages though, it’s up to the lender to decide whether they pass on the entire rate cut / rise, some of it or none of it. Thankfully though they know that people are keeping up to date with the current rates and won’t want their mortgages to become uncompetitive in any way.
A variable-rate mortgage can prove to be very attractive when the Bank of England’s base rate is low and / or likely to drop, possibly taking the cost of variable-rate mortgages down with it.
If your payments drop however, this can be a great opportunity to ‘overpay’ your mortgage: keep making the payments at the previous level in order to pay off more of the mortgage without paying a larger amount than you’re used to. Overpayment can reduce the overall cost of your mortgage by reducing the amount that incurs interest charges and let you pay it off earlier than originally expected.
You must be aware however that the cost can go up just as easily as it goes down. So once you have found out how much your monthly payments will be with a variable rate you must ask yourself “Are these payments as high as I can comfortably afford?”
If the answer to that question is “Yes”, then a variable-rate mortgage could be a dangerous prospect as if the rate was to increase how would you manage to meet the repayments?
Of course you would be free to search for a new mortgage if this ever happened. The majority of fixed-rate mortgages incur redemption penalties or charge an Early Repayment Charge (ERC) if you switch to a different mortgage before the end of the allotted term, but this is unlikely with variable-rate mortgages.
