Standard variable rate mortgages

What is a standard variable rate mortgage?

If you do not remortgage right away, you will most likely be on an SVR mortgage when your mortgage term expires. 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. For instance, the Bank of England decreased the base rate from 0.75 per cent to 0.10 per cent in March 2020, but not all lenders transferred the entire 0.65 per cent reduction to their clients.

There is no guarantee of what the rate will do when the Bank of England changes its Base Lending Rate. Still, in most cases, mortgages that revert to a standard variable rate are unlikely to have large penalty clauses for early repayment, meaning that most of us can remortgage without too much expense if a lender unilaterally raises its standard variable rate above the market.

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 more 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 per cent. The average SVR, on the other hand, was 4.41 per cent.

Assume you had a £200,000 mortgage with a 25-year fixed rate of 1.2 per cent. If that deal expires and you’re transferred to your lender’s SVR, which is 4.41 per cent, your monthly payments will increase by £329, 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.

Advantages and disadvantages of a SVR mortgage?

Advantages

• Early repayment fees will not be charged on most SVR mortgages. This means you won’t be penalized if you pay off your mortgage early or switch lenders

• Low fees – If you take up a mortgage that charges the lender’s SVR up front, you’ll almost certainly pay a low arrangement fee, if not none.

Disadvantages

• Standard variable rates are usually significantly higher than the best mortgage packages.

• Variable rates — Your lender can adjust the SVR at any time, causing your monthly payments to increase.

How much will I be paying?

Standard variable rates might be 2% to 5% higher than the base rate. Some lenders may have a ‘ceiling’ on SVRs. The lender may, for example, promise that their SVR will not climb more than a specific percentage point above the Bank of England’s base rate. There may be a ‘collar’ on a conventional variable rate mortgage, which means that your interest rate cannot fall below a set percentage. If you’re on an SVR, it’s worth seeing a mortgage broker see if switching to a new mortgage package may result in a cheaper interest rate.

Difference between standard rate and fixed rate mortgages?

There isn’t a one-size-fits-all solution. However, you should consider how you feel about risk and whether you can afford to increase your instalments if the interest rate rises. With a fixed-rate mortgage, your payments are predictable for a certain period, and you’re protected from an increase in monthly payments if interest rates rise. This could be handy if you’re on a tight budget or at the beginning of your mortgage adventure when interest makes up a greater amount of your payments.

On the other hand, a fixed agreement will not benefit from lower monthly payments if interest rates decline. If you leave your mortgage contract or pay it off before it’s supposed to expire, you’ll normally be billed an early repayment charge (ERC). It’s worth remembering that ERCs are sometimes tied to the tracker and reduced rates, so read your contract carefully and understand when any tie-in period ends. Although a variable rate mortgage is more volatile, you will pay less interest if interest rates fall. You can normally transfer deals or pay off your mortgage whenever you choose without paying an ECR if you’re on your lender’s SVR. This could be handy if you’re planning a move soon or want to pay off your mortgage early without incurring fines.

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.