When you reach the end of your tracker, fixed-rate or discount mortgage deal, your mortgage is likely to be moved to your lender’s standard variable rate mortgage.
A standard variable rate (SVR) mortgage means that the interest you pay on your mortgage can go up and down every month. It’s usually a more expensive option.
However, unlike a tracker mortgage, where your mortgage follows the base rate set by the Bank of England, your lender chooses the interest rate.
Your lender does not have to follow the Bank of England’s base rate, and they can raise or lower it by however much they like, whenever the like. In practice, many lenders use the base rate as a guide for their standard variable rate, and so most standard variable rates are 2-5% higher than the Bank of England’s base rate.
Despite the more expensive repayment terms, standard variable rate mortgages do have some advantages. The arrangement fees and early repayment fees on this kind of mortgage are normally very low, and in some cases, there are no fees at all.
Standard Variable Rate: How Does It Work?
A standard variable rate mortgage is a form of repayment mortgage. This means that every month, your mortgage payment goes towards repaying part of the capital you borrowed, and part of the interest you owe on that capital. At the end of the mortgage term, you will have paid off everything you owe, including interest, and own your home outright.
However, because the interest rate on a standard variable rate mortgage is variable, the amount of interest you pay each month can go up and down.
This can have quite a significant effect on your mortgage payment, especially in the early years of your term
Even though your mortgage payments may increase as a result of the variable rate, you won’t be paying off your loan any faster, because the raise will only going towards the interest on the money you borrowed, not the capital itself.
Standard Variable Rate: Who Is It For?
Anybody eligible for a mortgage could choose to take out a standard variable rate deal. However, due to their high-interest rates, they are not particularly competitive.
If you have a tracker or fixed-rate mortgage, you will be moved onto your lender’s standard variable rate at the end of your deal’s introductory period. Unlike tracker, discount, or fixed-rate deals, most standard variable rate mortgages do not charge you for remortgaging or repaying your mortgage early.
For this reason, standard variable rate mortgages can be a good option for people who are looking to move house, pay off their mortgage early or shop for a new mortgage deal.
Standard Variable Rate: How Much Does It Cost?
Standard variable rate mortgages are straightforward, but generally more expensive compared to other types of mortgages on the market which may offer more attractive interest rates and repayment terms.
In 2019, the average standard variable rate was 2-5% above the base rate set by the Bank of England. Many standard variable rates are bracketed- meaning the lender sets both a minimum and maximum limit the interest rate. Although your lender change the interest rate whenever they like, it must always fall within these limits. This could help you work out whether you would still be able to afford your mortgage if the interest rate were to rise.
As with most repayment mortgages, standard variable rate mortages are ‘front-loaded’, which means that for the first part of the mortgage, most of your payments go towards paying off interest. During this period, your payments can fluctuate quite a lot with changes to the interest rate.
For example, five years into a 25-year, £180, 000 mortgage with a 5% interest rate, your monthly payments would total £1187. With a rise of 1.5% in the SVR, these would increase by £154 per month.
Standard Variable Rate: How Long Does It Last?
If you decide to stay on your lender’s standard variable rate, you can do so for the rest of your mortgage term. However, there is no lock-in period and often no remortgaging fee- so you can choose to leave whenever you like.
Standard Variable Rate: Pros and Cons
|Low or no early repayment fee or remortgage fees||Interest rate is likely to go up and down, making it difficult to budget|
|No arrangement fees||If the rate rises, you could struggle to afford your mortgage. If you can’t pay, your home is at risk|
|Straightforward repayment plan with no deal expiry dates to remember||There are better rates available on other types of mortgages|
How Can The Mortgage Bank Help?
Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.
They have already helped thousands of people get the best remortgage deal even people that have been refused before, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.