Standard variable rate mortgages
As a homeowner, one of the most important decisions you will make is which mortgage type is best for you. There are many different types of mortgages available, each with its own advantages and disadvantages. One popular mortgage type is the variable rate mortgage. A variable rate mortgage has a low initial interest rate, which can save you money in the short term. However, the interest rate on a variable rate mortgage can go up or down depending on economic conditions, which impact Bank of England base rate, which then affects the mortgage interest rates. So, it’s important to understand how this type of mortgage works before you decide if it is right for you.
The following topics are covered below:
What is a standard variable rate mortgage?
If you do not remortgage right away upon your fixed period ending, you will most likely be on an SVR mortgage. In most cases, switching to a conventional variable rate is something you should strive to avoid because rates are typically higher than those offered by other forms of mortgages. In addition, although there is no assurance of movement, the standard variable rate frequently swings up and down with the Bank of England’s base rate.
How does a standard variable rate mortgage work?
The interest you’ll pay on a fixed rate, tracker, or discounted contract will almost certainly be significantly less than the interest you’ll pay on a lender’s typical variable rate. For example, the best mortgage interest rates available at the start of 2021 were roughly 1% to 1.5%. The average SVR, on the other hand, was 4.4%.
Assume you had a £200,000 mortgage with a 25-year fixed rate of 1.2%. If that deal expires and you are transferred to your lender’s SVR, which is 4.41%, your monthly payments will increase by £329. So, the new repayments will now range from £772 to £1,101, costing you an extra £4,000 per year. Therefore, it’s critical to keep track of when your initial rate expires and begin looking for a new mortgage deal a few months ahead of time. You’ll be able to avoid paying your lender’s costly SVR this way.
A mortgage calculator can assist you in weighing your options and calculating how much you might pay each month if interest rates change. If you’re unsure, a mortgage broker can assist you in determining which choice is the most cost-effective.
