Glossary - Variable Rate Mortgage

This is the most common used mortgage in the UK, but as it is tied to the Bank of England’s base rate it does not always work out to be the most effective mortgage for consumers. Monthly meetings result in the Bank of England’s base rate being agreed and this decision depends on the market conditions at the time. It is then used as the standard interest rate for a lot of financial products rates. The mortgage lender will add on their own interest rate on top of the Bank of England base rate, the two combined is what the consumer would pay for the finance borrowed. The mortgage becomes variable when the Bank of England’s base rate goes up or down. The standard mortgage lenders rate normally stays the same but this depends on the lender and the market conditions at the time.

Example: UK Variable Rate and Mortgages
For example : If a consumer takes out a variable rate mortgage when the Bank of England’s base rate is five percent, the mortgage lender then adds a further two percent, the customer would be paying seven percent interest on the capital borrowed.
A month later the Bank of England decides to raise the interest rate to reduce borrowing. Say it is raised a quarter of a percent, the customer would then pay a quarter of a percent interest extra a month.
A quarter of a percent does not sound very much, but if the consumer has a £100,000 mortgage a quarter percent rise means that the customer is paying £250 a year extra.
A one percent increase would mean an extra £1000 on a mortgage of £100, 000.
Even though the example above is very simple it explains how the variable rate mortgage and the mortgage repayments can change.

Mortgage Tip
How the interest base rate fluctuations effects all types of mortgage repayments depends on what sort of mortgage product individual consumers have:

• With a fixed rate mortgage it is not going to affect mortgage repayments.
• With a tracker rate mortgage it will affect the repayments, a rise or fall will be dependant on the direction of change in the base rate.
• With a capped rate mortgage it might affect repayments, a rise or fall will be dependant on the direction of change in the base rate and if the mortgage lender passes the change on to the customer. Also it will depend on the position of the cap or ceiling that the mortgage has. Should the Bank of England base rate rise above the cap, the consumer would only make repayments at the capped level, no higher.
• With a variable rate mortgage it might affect repayments, a rise or fall will be dependant on the direction of change in the base rate and if the mortgage lender passes the change on to the customer.
• With a flexible rate mortgage it might affect repayments, a rise or fall will be dependant on the direction of change in the base rate and if the mortgage lender passes the change on to the customer.
• With a interest only mortgage the consumer pays off only the interest on the mortgage loan, so repayments will be affected.

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