One of the most common mortgages around is a standard variable mortgage. Standard variable mortgages run on a standard variable interest rate – or SVR as it is often referred to. It is generally the rate that you’ll usually be moved to once your existing fixed, tracker or discount mortgage ends.
Most mortgage providers have an SVR, so it’s useful to know how a standard variable mortgage works. In this article, we explain what you need to know about a standard variable mortgage.
Standard variable mortgage explained
A standard variable mortgage falls under the category of a variable rate mortgage. With a variable rate mortgage, the interest rate charged on your borrowing can vary at any time. The rate is set by the mortgage lender. Whilst lenders generally try to keep their interest rates stable and competitive, these rates can change at any time in line with market forces such as the UK economy and any movements in the Bank of England Base Rate.
The standard variable rate is the standard, or basic interest rate, that your mortgage lender charges homebuyers. Unless you have opted for a specific mortgage deal, your borrowing will be charged at this rate for as long as you have your mortgage.
There normally aren’t any early repayment charges associated with SVR deals. This gives you flexibility and freedom to move between different deals and lenders if needed without worrying about penalties. You can generally also make overpayments, or take repayment holidays if necessary.
Whilst this all sounds great, many people are put off by standard variable mortgages. This is because the interest rate can increase or decrease at any point during the term. This can make it difficult to budget. If you are on an SVR mortgage, then it makes sense to factor in the cost of a possible modest increase in interest rates into your budget to ensure that you can still manage if one comes along.
Find out more – ‘Different types of mortgage’
How does a standard variable mortgage work?
Let’s talk a little more about how a standard variable mortgage works. It’s important to note that although the SVR can be influenced by changes in the Bank of England Base Rate, SVRs do not track the Base Rate at a set percentage. Therefore, they do not have to strictly follow the Base Rate. This means that they differ from tracker mortgages, as these mortgages move directly in line with another interest rate (typically the Bank of England’s Base Rate).
So, what does affect a lender’s SVR? Often, it’s the lender’s cost of borrowing. It may also be influenced by the lender’s appetite to lend. For example, if the lender is trying to attract more business, it may want to keep its SVR low to attract borrowers. But if it’s already heavily lent, it may decide to increase its SVR to restrict the flow of new applications for a while. A lender can choose to raise or lower its SVR whenever it wants, although it’s not normally advisable for them to change it too often as this causes uncertainty for borrowers and may put them off taking out mortgages with them.
As an example, let’s assume that the Base Rate rose by 1%. If you have a fixed mortgage deal, your repayments would not change because you have contracted to a fixed interest rate. With a tracker mortgage, your interest charge would increase by 1% to match, or track, the change in Base Rate. With a standard variable mortgage, however, whether or not your interest rate and repayments change would depend on your lender.
Find out more – ‘What is a fixed-rate mortgage?’
If you are currently on a fixed-rate or tracker deal, you will usually be moved automatically to your lender’s SVR once your existing deal expires. This is often a good time to review the mortgage market. Your lender’s SVR may not be the most competitive deal available to you. Shopping around for the best deal at this time will help to ensure that you aren’t paying more for your mortgage each month than you need to.
Speak to a mortgage advisor such as us here at Mortgage Light and we’ll help you review your options across the whole of the mortgage market. We’ll compare hundreds of different deals to find the one best suited to your personal circumstances
So, should you get a standard variable mortgage? The choice is yours. However, this is not a choice to be made lightly. Why not speak to one of our experts here at Mortgage Light? We’ll learn about your situation, weigh up your options and help you make the right decision. Contact us for free advice on 01908 597655 or head to our online enquiry form.