An introduction to variable rate mortgages

by Barclays Wealth International on November 15, 2010

Variable Rate Mortgages

What this variable rate mortgage guide covers

This guide will introduce you to variable rate mortgages and how to go about deciding if one would be right for you.

We also have guides on fixed rate mortgages and investment mortgages.

A variable rate mortgage is one on which the interest rate charged can go up or down during the lifetime of the mortgage. This means that the amount you have to pay each month can vary accordingly.

This variance is usually based on the ‘base rate’ set by the Bank of England i.e. the interest that banks themselves have to pay when borrowing money.

For example, if the Bank of England base rate increases by 0.5%, then the interest rate on your variable mortgage will probably go up by 0.5%.

Different types of variable rate mortgage

The term ‘variable mortgage’ covers a number of different mortgage structures. The main ones are explained below.

Standard variable rate

Most lenders will have a standard variable rate (SVR). This is the ordinary rate of interest they charge on a mortgage. It is almost always set a few percentage points above the Bank of England base rate.

When the base rate changes then, usually, so does the SVR. However, unlike a tracker, there is no obligation on the lender to change their SVR when the Bank of England Base rate moves.

In many cases, the SVR is also the rate that lenders default to after the end of a fixed or discounted period.

Tracker mortgages

A tracker mortgage is a variable mortgage in which the interest rate charged copies the movements of the Bank of England base rate or a different variable rate set by the lender.

So when the rate being tracked increases 0.5% so does the interest rate on the tracker mortgage.

The main advantage of a tracker mortgage is that when the base rate is low the tracker rate will reflect this. Conversely, when the base rate is high, the tracker will be high too.

Trackers may also offer flexibility as there are often no early repayment charges (see below). This gives you the option of varying the payments you make each month, or even remortgaging i.e. replacing the existing mortgage with another that better suits your needs.

Discount mortgages

A discount mortgage is an introductory period, for example the first two years of the mortgage, in which the variable interest rate offered by a lender is lower than its SVR.

For example, if the lender’s SVR is 5% above the Bank of England base rate, then for the first two years of your mortgage they might offer a rate of SVR discounted by 1% i.e. only 4% above the Bank of England base rate.

Early repayment charges (ERCs)

You might incur early repayment charges if you repay the mortgage during a discount or fixed term deal. The lender has provided a lower cost or fixed rate mortgage in return for which you have less flexibility.

What variable rate mortgage options are available?

Repayment mortgage

A repayment mortgage is one in which monthly payments are made to both repay the amount borrowed and cover the interest charged throughout the duration of the mortgage.

Interest-only mortgage

With an interest-only mortgage you just pay the interest on the mortgage each month and repay the amount borrowed in one lump sum at the end of the mortgage. Such a mortgage requires that separate provision be made to make this repayment, usually in the form of investments.

How much can you borrow?

Four times your annual salary is the widely used estimate for what you might be able to borrow. However, the real amount is entirely dependent on your personal circumstances.

Mortgage fees and charges

There are various fees and charges that you will incur during the lifetime of a mortgage. These include:

  • Application or arrangement fee. This is the up front administration cost charged by the lender
  • Valuation fee. This allows the lender to confirm the value of the property you are buying
  • Early repayment charges. These can be incurred if you repay early during the fixed term of some mortgages
  • Final repayment fee. Also referred to as the ‘exit fee’, this charge covers the administration costs of closing the mortgage and the handling of the associated legal documents.

What type of mortgage is best for you?

Choosing which type is best for you depends on a number of factors including:

  • Flexibility. If you want maximum flexibility, for example to be able to change the amount you repay each month, and are not concerned about monthly interest charges going up and down, then a variable rate mortgage could suit you
  • Interest rates. If you believe that interest rates will drop over the first few years of a mortgage, then a variable rate might be cheaper than a fixed rate
  • Your financial capacity. If you are absolutely sure that you could cope with the extra cost brought about by rising interest rates, then you may be better placed to take on a variable mortgage.

The main alternatives to variable rate mortgages

Fixed rate mortgages

This offers an introductory period, usually two to ten years, during which the interest charged on the mortgage does not change regardless of the Bank of England base rate or anything else.

The primary reason for choosing a fixed rate mortgage is predictability. With a fixed rate you know exactly how much you are going to have to pay and how much interest you will be charged each month. This makes budgeting much easier.

The risk is that during the fixed rate period, interest rates might fall. If this happens then the fixed rate mortgage might be more expensive than the alternative mortgage types.

Important: The interest rate chargeable on your mortgage may increase at the end of a fixed period so make sure you budget for this change. The credit crunch saw some severe increases at the end of some fixed terms giving rise to the phrase ‘rate shock’.

Offset mortgages

An off-set mortgage is one in which the borrower pays interest on their net borrowings. For example if the borrower has a mortgage of £100,000 and savings of £10,000, then they will only be charged interest on £90,000.

Mortgage fees and charges

There are various fees and charges that you will incur during the lifetime of a mortgage. These include:

  • Application or Arrangement fee. This is the up front administration cost charged by the lender
  • Valuation fee. To confirm the value of the property you are buying. You may also choose to have a more detailed survey undertaken in order to establish more information about the condition of the property. This is especially recommended for older properties
  • Early repayment charges. This might be charged if you repay the loan early during the fixed term of some mortgages
  • Final repayment fee. Also referred to as the ‘exit fee’. This charge covers the administration costs of closing the mortgage and handling the associated legal documents.

Reminder of terms used

Base rate. The underlying interest rate set by the Bank of England.

Remortgage. Taking out a new mortgage to pay off the old one. This is usually done in order to secure a mortgage that better suits the borrower either for lower interest rates or greater flexibility.

Standard variable rate (SVR). The interest rate a lender will charge on a mortgage before any discounts are taken into account. The SVR is usually several percentage points higher than the Bank of England base rate.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

For more information or to apply

To apply or find out more information, speak to a Barclays Wealth International Mortgage Adviser. They specialise in providing a range of residential and investment mortgages for property purchases in the UK, Jersey, Guernsey, Isle of Man and Gibraltar.

Call us on +44 (0)1624 684305

Visit the Barclays Wealth International website.

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If your loan is denominated in a currency other than sterling CHANGES IN THE EXCHANGE RATE MAY INCREASE THE STERLING EQUIVALENT OF YOUR DEBT.

Terms and conditions apply to all mortgage products. We strongly recommend that you obtain your own independent tax advice before proceeding with an offshore mortgage.

Barclays Wealth will require a first charge over the property.

Barclays Wealth is a responsible lender and when considering your application for borrowing, your financial circumstances will be appraised. Remember should you run into difficulties please contact us immediately.

In all forms of advertising and marketing material where repayments are quoted, we will show clearly a typical Annual Percentage Rate (APR). We will also clearly indicate in all lending-related advertising issued in Jersey that we abide by the Code of Practice for Consumer Lending.

Lines are open 7am to 8pm weekdays and 8am to 5pm weekends and UK bank holidays, local time. Call charges may vary. Please check with your local telecoms provider. Calls may be recorded for training and security purposes.

The products and services described on this page are provided by the following companies, which are part of Barclays Wealth: Barclays Bank PLC in England and Wales, Barclays Private Clients International (Gibraltar) Limited in Gibraltar and Barclays Private Clients International Limited in the Isle of Man, Jersey and Guernsey. For further information on these companies and Barclays Wealth please read the Important Information.

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