Tracker Vs Variable Rate Mortgages

While fixed-rate mortgages are the most common type of home loan in the UK, they are not the only option. Indeed, in some cases, a variable rate may be better suited to your circumstances.

In this article we’ll explain the advantages and disadvantages of variable and tracker rate mortgages, when each might be used, and why you should always speak to a broker to make sure you get the deal that’s right for you.

What’s the difference between a standard variable rate and tracker mortgage?

A standard variable rate mortgage is what you will revert onto at the end of the introductory rates period of your mortgage agreement, unless you refinance before it expires, while a tracker mortgage is one where the rate of interest is tied to an external marker, usually the Bank of England’s base rate.

Technically speaking, both of these mortgages are types of variable rate mortgage.

With any type of variable rate, your monthly payments are subject to change according to interest rate changes. So, you benefit when rates go down, but payments go up when interest rates rise.

However, it’s important to remember that when rates go up, the extra amount you pay only goes towards the interest and has no effect on your capital balance.

What is a standard variable rate?

Each lender has their own standard variable rate (SVR) for mortgages that it sets and amends as it sees fit.

SVRs tend to broadly follow the Bank of England base rate, but there is no requirement for them to do so and lenders have full control over how they rise and fall. This means that borrowers on the SVR can see their mortgage payments change sharply with no notice.

But it’s worth bearing in mind that the adverse publicity and loss of business that an unexpected and astronomical rise in rates would probably cause, means this situation is unlikely.

Usually, when any kind of fixed term mortgage deal comes to an end, your loan switches to the lenders’ SVR. These are usually uncompetitive, so most borrowers look to remortgage onto a lower rate.

What is a tracker rate?

A tracker rate mortgage is variable but tracks an external marker such as the Bank of England base rate (usually 1% or 2% above it). They are typically taken out for a fixed period, but because they usually track the base rate rather than the lenders’ SVR, changes are dictated by economic conditions and are not influenced by your mortgage provider.

A lender can change their SVR at any time. But the Bank of England reviews the base rate every six weeks, and potential rises are generally widely reported prior to being announced. So there is an element of predictability about potential rate changes.

Some tracker rate mortgages come with a cap (maximum rate you will pay) and/or collar (minimum rate you will pay) which can limit the effects of rate changes.

Would a discounted variable rate be better?

It depends on your circumstances, but to help you decide, here’s a rundown of how these mortgages work: a discounted variable rate is similar to a tracker but, rather than tracking the Bank of England base rate, it follows the lenders’ SVR.

They are usually taken out for a limited period of between two and five years, but this can be longer. In rare cases, it’s possible to get a discounted rate for the lifetime of the mortgage.

With this type of loan, you pay a lower rate than your lenders’ SVR and have the possibility of even better savings if the rate comes down (e.g. in response to the base rate falling).

But once again, the rate you pay is determined solely by your provider and is not actually linked to the base rate.

Is it a good idea to use a variable rate mortgage right now?

At the time of writing (August 2022), there is no right or wrong answer to this question as it very much depends on your unique circumstances.

On the face of it, you might be concerned that a variable rate means you can end up paying more than you should. But you should consider other factors too.

When is reverting to an SVR rate a good choice?

If you’re looking for flexibility, a variable rate mortgage can be a good solution:

• There is usually no early redemption charge (ERC) to switch to a better deal if you are on a lenders’ SVR. So, if you’re planning to move house soon and ‘port’ your mortgage, or you intend to remortgage and release equity but aren’t quite ready to do so yet, the SVR might be preferable to a tracker. This is because the fees associated with settling a mortgage early can offset the benefits of a lower rate.
• With no tie-in period, you can make unlimited overpayments to clear your loan quicker and reduce your overall cost of borrowing. This can be particularly effective if you have an SVR and rates fall, as simply maintaining your previous payment amount will reduce the amount of interest you pay. Tracker mortgages are typically restricted to annual overpayments of 10% of your mortgage balance.
• If your mortgage only has a short time left to run and the balance is low, the fees for remortgaging could outweigh the additional interest you will pay by sticking on the SVR.
• It might simply be that you are anticipating a major life event such as a potential promotion, becoming self-employed or having a baby, and don’t feel now is the right time to take on fixed financial commitments.

When to choose a tracker rate

Tracker rates are most popular when interest rates are low or dropping. Because they come with a tie in period, rates are usually lower than a lenders’ SVR.

Some, but not all, come with early redemption charges, but they can be an affordable and flexible short-term option given the right circumstances.

The most important thing to remember if you’re thinking about any kind of variable rate mortgage, is that it’s essential you fully understand the terms and conditions of borrowing and how rate changes will impact your mortgage payments, and overall cost of borrowing.

How a broker can help you compare the options

Choosing between a variable or fixed rate mortgage is a case of working out your intentions and then crunching the numbers to determine the most financially sound route to take.

To do this, you need to know all your options – and their associated costs. With so many different mortgage providers and products out there, going it alone is a mammoth task.

Using their market knowledge and connections, a broker will quickly narrow down your options and present you with the calculations and permutations to consider. Then, all that’s left is for you to make a fully informed decision about the best type of mortgage to take out.

Alternatives to tracker and variable rate mortgages

The alternative to the various types of variable rate mortgages, is a fixed rate deal. With a fixed rate mortgage, your lender guarantees the rate you will pay for a fixed period of time (usually two to five years).

The main benefit of a fixed rate is that you know exactly how much you will pay for the duration of your fixed term. This makes budgeting easier and protects you from the immediate impact of interest rate rises – although it also means you don’t benefit from rate cuts.

It’s also important to remember you relinquish the flexibility that comes with some variable rate mortgages.

Get matched a broker experienced in all types of mortgages

While there are times when the SVR or a tracker rate is a wise choice, choosing a variable rate mortgage is not a decision to be taken lightly.

The brokers we work with have whole-of-market access and can advise you on all UK mortgage products, including some exclusive deals not available on the high street. And our broker matching service will connect you with an advisor used to helping people just like you make the right decision.

Call 0808 189 0463 today or enquire online to get matched with your ideal broker,