Variable Rate Mortgage Detailed Description

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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.

Read Why you should never pay a standard variable rate.

To read more on this subject please see the list below or your mortgage guide or your home buying guide

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