Ruth Jackson-Kirby
When you first take out a mortgage, there are a variety of different types of interest rate you could be paying. It could be a fixed, a tracker or a discount rate. But they are all likely to switch to a standard variable rate (SVR) eventually. Here’s everything you need to know about standard variable rates.
What is a standard variable rate?
A standard variable rate (SVR) is an interest rate set by your lender. It is the default interest rate that mortgage customers are moved onto when their initial deal ends. For example, if you take out a two-year fixed-rate mortgage then after two years, if you don’t remortgage, you will be moved onto your lender’s SVR.
In most cases the SVR can be substantially higher than the interest rate you were paying so your monthly repayments will rise. Because it is a variable rate your lender can also change the SVR at any time.
What are SVR mortgages?
An SVR mortgage is a home loan charging the lender’s standard variable rate of interest. Your lender can change the rate of interest on your mortgage whenever they like. If they increase it then your monthly repayments will go up and your mortgage will become more expensive.
Most people who have an SVR mortgage have been moved onto it automatically when their initial fixed or tracker rate mortgage deal ended.
How do SVR mortgage rates compare to rates on other types of mortgage?
Your lender’s standard variable rate is likely to be much higher than the interest you would pay on a fixed rate, tracker or discounted deal. At the start of 2021 the best mortgage interest rates on offer were around 1% to 1.5%, according to Moneyfacts. In contrast, the average SVR was 4.41%.
Let’s say you have a 25-year £200,000 mortgage on a fixed-rate deal at 1.2%. If that deal ends and you are moved onto your lender’s SVR, which is 4.41%, then your monthly repayments would go up by £329 from £772 to £1,101, costing you an additional £4,000 every year.
This is why it is really important to make a note of when your initial rate will end and start shopping around for a new mortgage deal a couple of months beforehand. That way you can avoid paying your lender’s expensive SVR.
Pros and cons of mortgages that are subject to SVR
Pros
- Flexibility – Most SVR mortgages won’t have early repayment charges. This means you can overpay your mortgage or move lender easily without facing penalties.
- Low fees – If you take out a mortgage which charges the lender’s SVR at outset it is also likely to have a low arrangement fee, or possibly no arrangement fee at all.
Cons
- Expensive – Standard variable rates are usually substantially higher than the best mortgage deals.
- Variable rates – Your lender can change the SVR at any time which can result in your monthly repayments rising.
What are the options when my mortgage defaults to SVR?
When your mortgage defaults to your lender’s standard variable rate you have a number of choices.
For many people it makes sense to remortgage onto a new deal. This is likely to be cheaper than your lender’s SVR so will bring your monthly repayments down.
However, for some people remortgaging may not be an option. If you have a high loan to value (LTV) mortgage and house prices have dropped, you may find yourself in negative equity. This is where the amount you have borrowed on your mortgage exceeds the value of your home. It is very difficult to remortgage in this scenario as you would need a lender prepared to lend you more than the value of your home.
Equally, in recent years people with small deposits have struggled to remortgage when lenders pulled their 90% LTV mortgages.
You could also encounter problems if you have a poor credit rating or your income has dropped since you took out your current home loan, or you are now beyond the upper age limit for a standard mortgage. If the latter is the case you could consider moving onto a retirement interest-only mortgage.
If you are worried you won’t be able to remortgage there are a number of things you can do. Read our guide to improving your credit rating to get tips on how to make yourself more attractive to lenders. You should also consider speaking to a mortgage broker who may be able to find a solution for you.
When a SVR might be the best option
For some borrowers it may make sense to stay on a SVR. If you want to move house or repay your mortgage, for example, you can do so without facing early repayment penalties.
Similarly, if you have nearly finished repaying your mortgage, fees may mean it’s not cost-effective to switch to a cheaper rate. The equity in your property could even be so high that you may struggle to get a remortgage deal.
If you aren’t sure what to do, a mortgage broker can help to work out the most cost-effective option for you.
Image source: Getty Images
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