Detailed
description of a Variable Rate Mortgage
The
easiest way to think about variable interest rate mortgages (often
described as Standard Variable Rate mortgages) is like this:
•
Mortgage lenders have to borrow the money they lend you
• Their profit comes from charging you more interest than
they are paying
• When the interest rate your lender is paying goes up,
they pass on the same increase to you. This keeps their profit
margin the same.
For
example, if your building society is charged 5 per
cent interest on the money they borrow and they want to make 2
per cent profit, they will give you an interest rate of 7 per
cent.
If
the interest rate your lender pays is increased to 5.5 per cent,
then they will increase your interest rate to 7.5 per cent. This
keeps their profit the same, but costs you more.
Of
course, it can work in your favour. If the interest rate your
lender is being charged falls, then they will reduce your interest
rate too, reducing your monthly payments.
Variable
rate mortgages can be good, but you should always be aware that
there is potentially no restriction on how much your monthly payments
can be increased. If interest rates go up, so will your payments
– usually immediately.
If
you are not sure if this is the best option for you, consider
a fixed
rate, discounted
or capped
rate mortgage – click on the links for more details
on how these mortgages work.
