Variable mortgages are for those whose incomes are not particularly stretched. What are the ups and downs of entering into a standard variable mortgage?
When the Bank of England changes its Base Rate, (the interest rate it uses to control inflation and growth of the country’s economy), all the mortgage lenders will decide whether they want to pass that change on to their customers at that time or not.
Frequently the lender will decide, for example, not to pass on a base rate rise of 0.25%, in a period of uncertainty they may wait for the next decision from the Bank of England and if the rate is put up again by another 0.25% the lenders may choose that time to put up its customers’ monthly repayments by 0.5%, or they may choose to put it up by a little more or a little less.
Unlike a tracker mortgage the lenders are not tied in to making the same percentage change as the Bank of England. So with a standard variable rate mortgage you are at the mercy of the lender and their decision about how much to charge.
How much a litre?
This leaves you open to the petrol station syndrome – by that we mean when the price of oil goes up you see the prices in turn go up in forecourts all over the country. But when the price of oil drops, do you see those prices at the pump drop as quickly, or by as much?
Lenders it seems are not quite as blunt as the oil companies, and obviously they are regulated by The FSA, and have standard variable interest rates that they will stick to, so we are not saying they will try to con you, we are simply saying that there is a possibility that some lenders may leave rates slightly higher than necessary for a day or so. Remember that most interest is charged on a daily basis and so a day can make quite a difference to a lender with thousands of customers and hundreds of millions on loan.
Life’s rich tapestry
So, standard variable rate mortgages leave you at the mercy of both the Bank of England and the lender. The most important thing, if like most of us, you don’t have shed loads of disposable income every month is to make sure that you will be able to afford the monthly repayments if they should rise by several percentage points over the time you are likely hold the mortgage.
You can either talk this over with a financial adviser or work out the probabilities of how it might go by researching past rate changes on the internet and comparing it with the economic situation now.
Or on the other hand…
All of which is quite a faff to do accurately. And remember as all the best financial advertisements say when referring to investment funds: “past performance is not a guide to future performance”. So you might be tempted to just guess at what interest rates are going to do. However, if you are going to be that reckless then we hope you have either a great deal of money to spare to safeguard your house against being repossessed or you should be opting for a completely different type of mortgage.
The good news
On standard variable rate mortgages there are usually no early repayment charges so again this tends to fall in line with the idea that standard variable mortgages might be good for those with a large income. Putting additional funds into a mortgage over and above your designated monthly repayment can soon mount up and after a few years you could be well ahead of your repayment schedule. If your intention is to try to pay off your mortgage early this is certainly one way to do it.