Definition
A variable-rate mortgage, adjustable-rate mortgage, or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender’s standard variable rate/base rate. There may be a direct and legally defined link to the underlying index, but where the lender offers no specific link to the underlying market or index the rate can be changed at the lender’s discretion. The term “variable-rate mortgage” is most common outside the United States, whilst in the United States, “adjustable-rate mortgage” is most common, and implies a mortgage regulated by the Federal government, with caps on charges. In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages.
Home Ownership by Country
Variable Rate Mortgage
What is ‘Variable Rate Mortgage’
A type of home loan in which the interest rate is not fixed. The two most common types of mortgages in the United States are fixed rate and variable rate (also called adjustable rate). With a fixed rate mortgage, the interest rate does not change for the entire loan term.
Borrowers know with certainty what the interest and principal payment on their mortgage will be each month for as long as they carry the mortgage. With a variable rate mortgage, the interest rate adjusts periodically. Monthly principal and interest payments change according to a predetermined schedule throughout the life of the loan.
Explaining ‘Variable Rate Mortgage’
Variable rate mortgages are attractive because they usually have a low interest rate for an initial period of a few years, and that initial rate is usually less than the rate on a fixed rate mortgage. This interest-rate difference can yield significant savings for borrowers at the beginning of the mortgage term. However, once the introductory period ends, the rate will move up or down as market interest rates change. Interest rate increases can be problematic for borrowers with variable rate mortgages. In a worst-case scenario, the mortgage payments can become so unaffordable that the homeowner defaults and eventually loses the home to foreclosure. In general, the more money the homeowner has borrowed, the more a change in interest rate will affect the monthly payment amount.
Further Reading
- An analysis of variable rate loan contracts – www.jstor.org [PDF]
- Housing finance and monetary policy – academic.oup.com [PDF]
- Choosing between fixed and adjustable rate mortgages: Note – www.jstor.org [PDF]
- Fixed‐and Variable‐Rate Mortgages, Business Cycles, and Monetary Policy – onlinelibrary.wiley.com [PDF]
- The process of financial innovation – www.jstor.org [PDF]
- Modeling surrender and lapse rates with economic variables – www.tandfonline.com [PDF]
- Variable rate mortgages: confusion of means and ends – www.tandfonline.com [PDF]
- Markets and housing finance – www.sciencedirect.com [PDF]
- Some economic implications of the indexing of financial assets with special reference to mortgages – link.springer.com [PDF]
- The interaction between mortgage financing and housing prices in Greece – link.springer.com [PDF]
