There are essentially two types of variable mortgage. A normal one will just have an interest rate which can be changed at any time by the lender and you will not necessarily be able to predict when. A tracker will only change if the Bank of England changed the rates. There are pros and cons of each.
Tracker Mortgages
The tracker mortgage charge normally works in two ways. You will be charged a fixed interest rate and this will be added on to the Bank of England base rate to make the interest that you pay. So as the Bank of England rates change, what you pay will change although that fixed part will always be the same. For example, if the Bank of England rate is 1% and the bank charges you 1% plus the base rate you will pay 2%. If the Bank of England doubles their rate you will pay the 2% plus that 1% so 3% in total. Even if the Bank of England rates go down to zero, you will still have to pay that 1%. You can see that the amount that the bank charges you on top of the Bank of England rate can be crucial. If it is a really high amount then you could end up paying a lot regardless of the Bank of England rate, however, if it is a small amount then you could do well with this sort of mortgage. So, you will need to look into what you will be charged to decide whether you think that this tracker mortgage will work for you. It will also be much better to be on a tracker if rates are going to fall as you will be guaranteed to pay less, however, if rates go up you will be guaranteed to pay more. It is not easy to predict rates of course. It is unlikely that you will be tied in with a tracker though (it is important to check this) so you can remortgage at any time if you think that it is getting too expensive for you.
Variable Rate Mortgages
Although you may think that a variable rate mortgage is the same as a tracker the difference is that if the Bank of England base rates change, they will not have to change their rates. This means that you could end up paying quite different amounts of money. When the Bank of England puts up interest rates, it is very likely that all lenders will put up their rates so that they can keep making money. However, when the Bank of England puts the rates down, they do not always put theirs down as they want to keep on making a bit more profit. In fact, it is much less likely that rates will fall than rise. They can change rates at any time too so may decide to just put rates up at any time. This does not necessarily lead to more uncertainty as the Bank of England decide rate changes only a few weeks in advance of making them, but it could mean that your rates will go up outside of Bank of England rate changes. As with a tracker though, you will not normally be tied in so you can remortgage at any time if you do not like the rates.
It can be a tricky decision but there are a few main things to consider. Firstly, how does the tracker rate compare with the normal variable rate and do you think the fixed part of the tracker is unreasonably expensive. Secondly, think about whether you feel that rates are likely to go up or down. It is a good idea to also make sure that you are not tied in to either and then you will be able to remortgage if you change your mind. Do bear in mind that they may be fees associated with this though – perhaps fees for ending your mortgage with one company and fees for opening an account with another so make sure that you check these out as well.
