When choosing a mortgage one of the biggest factors influencing your monthly payments is the interest rate type you pick. While fixed rates offer certainty, many borrowers also consider variable-rate options where the interest rate can change over time. But what is a variable rate mortgage exactly and how does it work?

This guide explains the concept of variable-rate mortgages, the common types available in the UK market, their potential benefits and drawbacks and what you need to consider to decide if this approach suits your needs.

 

 

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Defining Variable Rate Mortgages

The core idea defining what is a variable rate mortgage is that the interest rate you pay is not fixed for the duration of the deal. Instead it can move up or down based on changes in underlying interest rates (like the Bank of England Base Rate) or at the lender’s discretion depending on the specific product type.

This directly contrasts with fixed-rate mortgages, where your rate remains unchanged for a set period providing payment stability.
With a variable rate your monthly payments can fluctuate, making budgeting less predictable but potentially delivering savings should rates fall.

Common Types of Variable Rate Mortgages

Understanding the different forms helps clarify what is a variable rate mortgage. The main types you’ll encounter in the UK include:

Tracker Mortgages

These directly follow or ‘track’ an external base rate, almost always the Bank of England Base Rate plus a fixed percentage set by the lender (e.g. Base Rate + 0.8%). If the Base Rate changes by 0.25% your rate changes by 0.25%, usually the following month.

Find out more: what is a tracker mortgage?

Discounted Rate Mortgages

These offer a specific discount off the lender’s Standard Variable Rate (SVR) for a set period (e.g. a 1.5% discount from the SVR for 2 years). If the lender alters its SVR, your rate will also change, maintaining that discount margin. SVR changes are at the lender’s discretion though they are often influenced by the Base Rate.

Standard Variable Rate (SVR)

This is the lender’s default ‘catch-all’ rate. Once an initial fixed tracker or discount deal ends your mortgage typically reverts to the lender’s SVR unless you remortgage (see our guide – should you remortgage your property?). SVRs can be changed by the lender when they decide and are usually higher than introductory deal rates.

Pros and Cons of Variable Rate Mortgages

Understanding what is a variable rate mortgage and whether it’s right for you involves weighing the potential upsides against the downsides:

PROS

✅ Potential for lower payments
If the underlying interest rates (Base Rate or SVR) fall, your monthly payments could decrease, saving you money.

✅ Possibly lower initial rates
Sometimes variable rates might start slightly lower than equivalent fixed-rate deals (though not always).

✅ Potential flexibility
Some variable deals might have lower or shorter Early Repayment Charge (ERC) periods compared to long-term fixed rates but this varies greatly and must be checked carefully.

CONS

❌ Risk of higher payments
If underlying rates rise, your monthly payments will increase, sometimes significantly impacting your budget.

❌ Budgeting uncertainty
Fluctuating payments make precise long-term budgeting more challenging.

❌ Less peace of mind
The lack of payment certainty can be stressful for some borrowers compared to the stability of a fixed rate.

Is a variable rate mortgage right for you?

Deciding if what is a variable rate mortgage offers is right for you depends on your financial circumstances and attitude to risk

A variable rate might suit you if you have flexibility in your budget and could comfortably afford potential increases in your monthly payments. They could be appropriate if you have a higher tolerance for risk and want the possibility of benefiting if interest rates fall. And finally variable rate mortgages can be good if you anticipate needing flexibility relatively soon and find a variable deal with favourable ERC terms.

However, a variable rate is likely less suitable if you need the certainty of fixed monthly payments for budgeting stability, perhaps as a first-time buyer or if you are on a tighter budget. These sorts of mortgages are less good for people who are uncomfortable with the risk of your payments potentially increasing or for those who prefer long-term peace of mind by knowing the rate won’t change unexpectedly.

Whatever you choose, it’s also really vital to consider the specific type of variable rate on offer. Remember, a tracker offers more transparency on rate changes than a discounted rate linked to the lender’s SVR.

OneDome is here to help

Choosing a mortgage is complex but OneDome is here to help. If you have any questions about the specifics of mortgages, the wider mortgage process or want tailored advice on the different types of mortgages that suit your situation you can:

Important: Your home may be repossessed if you do not keep up repayments on your mortgage.