What is a Standard Variable Rate Mortgage?
Written by Adele MacGregor
1st Sep 2020 (Last updated on 25th Nov 2020) 7 minute read
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 they 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 will come across a “ceiling” and “collar”. A ceiling is the upper limit of how high the interest rate can get. This limits how much you could pay each month. Collar is the percentage your interest rate cannot fall below, meaning there will be a certain minimum payment the SVR can go to. A standard variable rate mortgage is what you'll automatically be transferred onto when your original mortgage deal, be it fixed-rate, tracker or discount deal, comes to an end. Usually, a lender's SVRs are higher than the best fixed rate deals and it’s advisable to consider remortgaging if you’re paying your lender’s SVR.
Advantages of a Standard Variable Rate Mortgage
Being on your lender’s SVR is not all negative and can suit some individuals and their circumstances. Below we’ve set out the advantages of a SVR mortgage.
- If you overpay or clear your SVR mortgage, you won’t have to pay a fee.
- An SVR mortgage might have lower arrangement fees than a fixed-rate or tracker mortgage deal.
- If interest rates go down, your mortgage repayments could also go down.
- There will likely be no ‘Early Repayment Charge’. This means more flexibility to pay off your mortgage early, overpay or remortgage to a new deal.
Disadvantages of a Standard Variable Rate Mortgage
Here we’ve listed the disadvantages of an SVR mortgage as they do not suit everyone and can cost significantly more than other mortgage arrangements.
- The lender can choose to change its SVR at any time, meaning your monthly repayments could go up unexpectedly.
- Standards variable rates are often higher than other rates for different types of mortgage.
- If interest rates increase, so will your monthly repayments.
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How is the Standard Variable Rate Set?
A Standard Variable Rate is ultimately set by each individual mortgage provider and can change at any time at their 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 vase rate is the interest rate that lenders and banks pay when they borrow from the Bank of England and is the most important base rate in the UK. It not only influences the interest rates of mortgages and a lender's SVR, but savings accounts, credit cards and any other loan.
This base rate is decided upon by the Monetary Policy Committee who meet roughly every 6 weeks. Currently, the Bank of England base rate is the lowest the country has ever seen, sitting at 0.1% as of March 19th 2020 in an emergency move as a result of 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 over a period of two, three or five years where your monthly payments will stay the same.
On a fixed-rate mortgage, your payments won’t be affected by any changes to the Bank of England base rate. On the one hand, this benefits those taking out the loan as they won’t see an increase in their monthly mortgage repayments during the fixed term. It does, however, mean that if the base rate drops lower than the rate set for your fixed term, you won’t benefit from the savings. In this case, someone on a standard variable rate mortgage would.
At the end of the agreed fixed-rate period, your mortgage will automatically be moved to your lender’s standard variable rate. In most cases, the SVR will be more than you were paying on the fixed-rate and your payments are likely to increase and will not remain stagnant, leaving you potentially paying a varying amount each month. As a result, many people opt to remortgage for a better deal before 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 and financial planning.
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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 anticipating life changes or events, such as a new job, having a baby or moving home in the near future, a Standard Variable Rate mortgage offers you some flexibility. This way you can move to a better deal when you are ready.
Unlike other mortgage products, switching from an SVR does not incur an early repayment charge (EPC). This also means there is no penalty for overpayments either, meaning you could pay off your mortgage quicker if you have the funds.
SVR’s are not suitable for those who want to know exactly how much is leaving their account each month and do not want to risk paying up when base rates climb. SVR’s are also not suitable for certain circumstances, for example 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 most likely 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 be expected to pay early repayment charges (ERCs). These vary between mortgage lenders 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 offer when you are ready. When it comes to remortgaging, talk to your mortgage adviser about your options or consider hiring a mortgage broker to assist you.