Understanding Standard Variable Rates (SVR) on your mortgage documents is crucial because it affects the overall cost of your mortgage. While mortgage jargon can be confusing, it’s important for anyone taking out a mortgage to grasp the concept of SVR.
So…what is it?
A Standard Variable Rate (SVR) is the interest rate charged by your lender after an initial discounted, fixed, or tracker rate expires. It’s important to note that the headline interest rates advertised by lenders only tell part of the story. If you don’t remortgage after the introductory deal, the true lifetime cost of your mortgage could be significantly higher.
For example, a mortgage company may offer a fixed rate of 5% for 5 years, which then switches to an SVR of 7.49% after the fixed rate period ends. This means you’d pay 5% interest for the first 5 years and 7.49% for the remaining term, which could be 30+ years depending on your loan term.
How Does a Standard Variable Rate Impact the Cost of a Mortgage?
Lenders typically set the SVR higher than the initial fixed or tracker rates. Therefore, when the SVR comes into effect, your monthly mortgage payments usually increase.
Moreover, SVRs are subject to change based on economic and lender factors. This means that the 7.49% SVR in the previous example is not fixed and can fluctuate.
What Causes a Standard Variable Rate to Change?
The term “variable” in SVR tells you that the interest rate is not fixed and can change over the life of the mortgage. Each lender has its own SVR and can increase or decrease it at their discretion.
While changes in the Bank of England’s base rate are a significant driver for lenders adjusting their SVR, other factors can also contribute. These include inflation impacting a lender’s costs, negative economic outlooks, or financial pressures on the lender’s business. Lenders may increase their SVR to protect themselves or boost revenue.
It’s worth noting that lenders sometimes impose “ceilings” and “collars” on their SVRs. A ceiling sets a maximum interest rate, protecting borrowers from excessive increases, while a collar sets a minimum interest rate, preventing rates from dropping too low.
Being ‘Stuck’ on a Standard Variable Rate
It’s generally advisable to remortgage or do a product transfer to avoid going on to an SVR due to higher rates and potential rate changes. However, some circumstances may prevent borrowers from remortgaging, leaving them “stuck” on the SVR.
Reasons for being stuck on the SVR can include changes in credit file, personal circumstances, mortgage products being withdrawn from the market, shifts in loan-to-value ratios (how much equity is in your property), or even property-related issues. These situations may hinder the ability to secure a new mortgage deal, requiring borrowers to remain on the SVR.
Are There any Benefits of Being on a Standard Variable Rate?
While fixed, discounted, or tracker deals generally offer lower monthly payments, there are scenarios where remaining on an SVR can be advantageous. These include the ability to make overpayments without penalties, plans to move home, intentions to pay off the mortgage, or waiting for more attractive mortgage deals.
Seeking professional advice from a Mortgage Advisor can help determine the best course of action based on individual circumstances.
Should I Remortgage or do a Product Transfer to switch from a Standard Variable Rate?
Making the decision to remortgage or do a product transfer depends on individual circumstances. Consulting with a Mortgage Advisor is crucial to assess your credit history, income, employment, housing plans, current deal, available mortgage offers, and market trends. While most situations favour switching from an SVR, tailored advice is essential.
