Standard Variable
by Ellise Walsh

When shopping for a home, selling a home, or looking for a mortgage, you may run across the term standard variable. In the mortgage world a standard variable is generally used to refer to the difference between the interest rate on a mortgage and the underlying interest rate on which it is based.

It is standard practice for a variable rate mortgage to be keyed off of a commonly used interest rate. As this interest rate rises and falls, so does the interest rate on the home mortgage loan. The interest rate of the mortgage will be some percentage over or under this key interest rate.

There are many different types of variable rate mortgages, so it is a good idea to shop around at a variety of lenders before making a decision on the best mortgage loan for your needs. Interest rates and terms can vary widely among different lenders, so it is definitely a good idea to shop around for the best loan terms.

Of course, the decision to go with a variable rate mortgage loan in the first place will be largely determined by where you think interest rates are headed. Unfortunately for borrower and lender alike this is often a difficult determination to make. Even experts have trouble sometimes determining where interest rates are going, and a wrong decision can be costly in terms of the interest rate and monthly payment on your mortgage.

To protect yourself against unforeseen interest rate rises, it is important to know the cap on the variable rate mortgage. The interest rate cap is the highest rate that can be charged on the mortgage loan. It is important to run the numbers and determine your monthly mortgage payment in such a worst case scenario. Although it is unlikely that the interest rate will hit its cap, it is always possible, and it is best to be prepared for such a situation.

The bottom line on the standard variable, and the variable rate mortgage in general is this: if you think interest rates are likely to stay steady or fall over time, a variable rate mortgage is generally a good idea. If interest rates are low and likely to rise, however, it may be better to lock in a low interest rate today than to wait for rates to fall further.

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