A variable interest rate is just that – variable. While a fixed rate of interest stays at the advertised rate for a set time, perhaps a year or more, a variable interest rate can fluctuate at any time. In terms of a mortgage, one that has a variable interest rate is usually referred to simply as a variable rate mortgage.
There are two versions of a variable rate, however. One is a standard variable rate, often abbreviated to SVR. The other is a tracker interest rate. This tracks the current base rate, while being positioned slightly above it. For example, if the base rate is 0.5%, your interest rate might be 1.5% above that at 2%. If the base rate goes up to 1%, your interest rate would go up by 1.5% to 2.5% instead.
There are pros and cons to accepting a home loan with a variable rate rather than a fixed rate. Many people opt for a fixed rate because they know exactly what the applicable rate will be for the agreed period. However, a fixed rate tends to be higher than a variable rate deal if interest rates are low. Of course, a variable rate puts you at risk of seeing it rise if the base rate goes up. Lenders are typically quick to pass on any rises in the Bank of England base rate when they occur. It is possible, however, that a lender might alter their standard variable rate for other reasons, so this is something to be aware of.
There is always an element of risk involved with a variable interest rate. You may find you can get a far lower monthly repayment with such a deal, yet you are at risk of future rises in the base rate too.
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