What is a Standard Variable Rate Mortgage?
A standard variable rate mortgage is a type of mortgage where the interest on your mortgage repayments is set at your lender’s standard variable rate (SVR).
In this case, the interest rate you pay, and therefore your monthly payments, can potentially go up or down each month. Your lender’s SVR will be influenced by changes to the Bank of England base rate, however, the SVR is ultimately down to the lender’s discretion.
Compare My Move work with experts in both the property and financial industries to help answer the important questions about your property purchase. In this article, we explore Standard Variable Rate mortgages, what the advantages and disadvantages are and who they are best suited for.
How Do Standard Variable Rate Mortgages Work?
Each mortgage lender will have a standard variable rate (SVR) which it can change at any time, although changes are influenced by the Bank of England base rate.
What this means is the amount of interest you pay on your mortgage repayments each month will depend on the lenders SVR. As a result, you could end up paying more on some months and less on others. Be aware that when you are paying more, this is solely interest and does not mean you are paying more off on your mortgage.
With an SVR, you might come across a “ceiling” or “collar”. A ceiling is the upper limit of how high the interest rate can get. This limits how much you could pay each month. The collar is the percentage your interest rate cannot fall below, meaning there will be a certain minimum rate the SVR can fall to.
If you have a fixed rate mortgage, your interest rate and therefore payments, will remain the same for the duration of the fixed rate (e.g. normally two or five years). However, when your fixed rate ends, you will normally be transferred to your lender’s SVR
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How is the Rate Set?
A Standard Variable Rate is set by each individual mortgage provider and can change at any time at its discretion. However, lenders’ base rates are largely set and influenced based on the Bank of England base rate.
Despite the name, The Bank of England is the central bank for the United Kingdom, not just England. The base rate is the interest rate that lenders and banks pay when they borrow from the Bank of England.
The base rate influences the interest rates on mortgages, loans, credit cards and other types of borrowing, as well as the interest rates paid on balances held in savings accounts.
This base rate is decided upon by the Monetary Policy Committee which meets monthly. Currently, the Bank of England base rate is the lowest on record, 0.1% since March 19th 2020 after it was reduced in an emergency move to limit the impact of the coronavirus pandemic on the UK economy.
Standard Variable Rate vs Fixed-Rate Mortgages
While some lenders offer mortgages at the SVR, the most common reason you’ll pay the SVR is because it is the default rate when a fixed-rate mortgage deal ends.
As the name suggests, a fixed-rate mortgage means that the interest rate on your mortgage, and therefore your monthly payments, will be fixed for a set amount of time. This is normally two, three or five years.
On a fixed-rate mortgage, your payments won’t be affected by any changes to the Bank of England base rate. This can help with budgeting as you’ll know exactly what your monthly payments will be for the duration of the fix.
However, you won’t benefit from any decrease in the base rate or your lender’s SVR.
At the end of the agreed fixed-rate period, your mortgage will usually automatically be moved to your lender’s SVR. In most cases, the SVR will be more than you were paying on the fixed-rate and your payments will increase. They could also change month to month if your lender changes its SVR. This can make budgeting more difficult. As a result, many people remortgage for a better deal at the end of their fixed term.
One of the biggest advantages of opting for a fixed-rate mortgage is the security it offers. This is ideal for those who want to know exactly how much they will be paying each month, allowing for easier budgeting.
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When is it a Good Idea to Be on Your SVR?
For the most part, your lender’s SVR will usually be a less favourable rate than any fixed-rate mortgage deal. However, if you’re planning to move home in the near future, a SVR mortgage offers you some flexibility. This is because you can move away from a SVR mortgage without paying early repayment charges.
There aren’t any penalties for overpayments either, meaning you could pay off your mortgage quicker if you have the money.
SVRs are not suitable for people who want to know exactly how much they will be paying on their mortgage each month, or who don’t want to risk their payments going up should the base rate rise. An example of this is those taking out a mortgage whilst on a zero-hour contract.
Remortgaging From Your SVR
Once the term of your fixed-rate or other mortgage offer comes to an end, you will be moved to your lender’s SVR. As we’ve mentioned above, this is likely to be more than you were paying on the fixed-rate. As a result, your monthly mortgage repayments will increase.
However, it is possible to avoid this and potentially save money, by remortgaging your house in favour of a better mortgage deal once your original mortgage deal comes to an end.
If you decide to remortgage or move house before your fixed-rate deal ends, you will normally have to pay early repayment charges (ERCs). These vary between mortgage lenders and products but can potentially be expensive.
However, if you are already on your lender’s SVR, you won’t face any ERCs for remortgaging to a better deal when you are ready. When it comes to remortgaging, you'll need a solicitor to help with the conveyancing process. To learn more, read Do You Need a Solicitor when Remortgaging.
Learn More About Mortgages and Deposits
This article is part of our mortgages and deposits guide. In our next article, we'll explore everything you need to know about interest-only mortgages from how to repay it to the eligibility criteria. To find out more read interest-only mortgages.
