What is a standard variable rate mortgage?
Ordinarily, when your introductory fixed, tracker or discount mortgage offer comes to an end, you are automatically transferred onto your lenders standard variable rate (SVR) – the default interest rate you’ll be charged if you don’t re-mortgage.
Just how much interest you’ll be charged entirely depends on your lender, as each sets its own rate, but as a gauge, its ordinarily between 2% and 5% above the Bank of England base rate.
By way of example, should the Bank of England base rate increase by 1%, your lender could choose to increase their SVR by:
• more than 1%
• less than 1%
Albeit unlikely, they could opt to leave their rate as is, maybe even reduce it, but to be perfectly honest, the chances are extremely unlikely.
How does a SVR work?
SVRs tend to be a higher rate than other types of mortgages and as the name suggests, a variable rate means that the interest amount can fluctuate up or down. So, when your introductory mortgage deal ends, your monthly repayment amount could change significant and its incredibly important that you can cover the repayments should they increase.
When repaying a mortgage, a proportion of the money goes towards the interest you are charged by your chosen lender, the remainder repays the money borrowed.
It’s important to note that if your lender increases its standard variable rate, whereby increasing your monthly repayment amount, that the extra money only goes towards the meeting your lenders higher interest rate, NOT the money borrowed. Needless to say, you won’t be paying off your mortgage any quicker.
Should I stay on the SVR?
Also known as reversion rate mortgages, SVRs are generally higher than fixed-term rates, so if your current deal is coming to an end, you should certainly consider re-mortgaging.
However, if you are planning on re-mortgaging or moving in the near future, an SVR mortgage can provide some flexibility, as you’re less likely to face any early repayment charges. Charges incurred as a penalty for repaying your loan earlier than the agreed term.
How is the SVR set?
A lender can raise or lower its SVR by any amount and at any time. As a borrower, you have no control over these changes.
Standard variable rates can be influenced by changes in the Bank of England’s base rate, which is currently 0.1% (January 2022).
But the base rate is only one of several factors which a lender will take into account when setting its SVR - including the lender's cost of borrowing, risk management, and internal targets.
How much will I pay?
This will depend on your lender, but some may have a ‘ceiling’, whereby they guarantee that their SVR won’t go above a certain percentage above the Bank of England base rate.
There may also be a ‘collar’ meaning that their interest rate will not fall below a certain percentage.
If you do find yourself on a standard variable rate, definitely get in touch as its highly likely that we can find you a far better deal.