What are the different types of variable rates?

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So, you are thinking about taking out a variable rate mortgage? Variable rate mortgages are home loans where the rate will adjust over time. These adjustments are determined by the loan agreement, and the rates are linked to the market. Before applying for a variable rate mortgage, it is important to understand what rates are available, so that you can decide which best suits your needs and lifestyle.

When you are taking out a mortgage, one of the most important things that you need to decide on is the rate. The monthly repayment that you will make over the mortgage term is significantly affected by the interest rate.

Outlined below are the five different types of variable rates.

Standard Variable Rate

This interest rate is influenced by multiple factors and can increase and decrease over time. Therefore, your monthly mortgage repayments can be higher one month and lower in another. Standard variable rates are linked to the European Central Bank (ECB); however, your rate is determined at your lender’s discretion. This means that your lender is not forced to adjust your rate based on fluctuations of the ECB rate. Factors that will affect your lender’s decision in adjusting your rate include level of market competition and the lender’s costs.

Tracker Variable Rate

Tracker variable rates are tied to the ECB rate. These rates are set at a specific fixed percentage above the ECB rate, so monthly mortgage repayments will reflect the increases and decreases of the ECB rate.

Discounted Variable Rate

This interest rate is a temporary rate that usually lasts for about 12 months, that is offered to incentivize new customers. With a discounted variable rate, the rate is set below the standard variable rate for a predetermined period. Once that period ends, the rate is either reverted to the standard variable rate or to a fixed rate.

Loan-to-Value (LTV) Rate

For LTV rates, the rate on your mortgage is dependent on the amount that you still owe on your home loan relative to the market value of your home. Oftentimes, lenders will offer lower LTV mortgages lower variable rates because there is less risk for the lender.

Capped Variable Rate 

Capped variable rates are like standard variable rates in that they are linked to the ECB rate. However, capped rates have an upper limit that the rate cannot rise above. Therefore, your rate is variable and will change according to the ECB rate, but your rate will not increase above your established cap even if ECB rates increase above the cap. 

Understanding what each type of variable rate entails will help you make an informed decision about choosing the mortgage that best suits your needs.