A standard variable rate (SVR) mortgage means the interest on your mortgage repayments can differ month to month.
Banks and building societies have their own SVR which is influenced by the Bank of England’s base interest rate. If the base interest rate goes down, your interest rate is likely to follow suit and vice versa with increases.
In this article, we’ll take you through SVR mortgages and the pros and cons, so you can have a better understanding of how they work.
How Do Standard Variable Rate Mortgages Work?
Each mortgage lender has an SVR that may change depending on the Bank of England’s base interest rate. What this means is the amount of interest you pay on your mortgage repayments each month will depend on the lender's SVR.
Your repayments can fluctuate, but regardless, this cost is solely interest and does not mean you are paying more off 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 2 or 5 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?
The SVR is set by each 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 base rate is the interest rate that lenders and banks pay when they borrow from the Bank of England.
The Monetary Policy Committee decides the base rate monthly that impacts interest paid on mortgages, loans, credit cards, and other borrowing accounts.
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.
In most cases, the SVR will be higher and they may change month to month if your lender changes its SVR. This can make budgeting more difficult. As a result, many homeowners choose to explore remortgaging options when their fixed term ends, particularly if they’re moved onto an SVR..
One of the biggest advantages of opting for a fixed-rate mortgage is the security it offers. This can suit people who prefer predictable payments, as it allows for easier budgeting during the fixed term.
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When Might an SVR Be Beneficial?
In many cases, a lender’s SVR may be less competitive than fixed-rate deals. If you’re planning to move home shortly, SVR mortgages offer some flexibility as there are no early repayment charges.
There aren’t any penalties for overpayments either, meaning you could pay off your mortgage quicker if you have the money.
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. Some homeowners choose to remortgage instead of moving onto their lender’s SVR, particularly if other deals offer lower interest rates.
If you decide to remortgage or move house before your fixed-rate deal ends, you will normally have to pay an early repayment charge (ERC). These vary between mortgage lenders and products can be expensive.
