What is a standard variable rate mortgage?
With a standard variable rate mortgage, the amount of interest you pay each month could change.
The standard variable rate (SVR) is set by your lender, which can raise or lower it by any amount and at any time. When we checked in July, the average SVR was 4.72% according to Moneyfacts, with the highest at 6.08%, and the lowest at 2.65%.
Each lender has its own SVR and it is the default interest rate that applies if you don’t have a limited-term deal or discount. So when a fixed, tracker or discount mortgage deal comes to an end, you’ll usually be transferred automatically onto your lender's SVR.
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How does a standard variable rate mortgage work?
A standard variable rate is a type of variable-rate mortgage, meaning the total amount that you pay each month could change.
When you repay your mortgage, part of the money goes towards the interest charged by your lender, and the other part towards repaying the money you've borrowed (the capital).
If your lender raises its SVR, your monthly payments will increase. But the extra money you pay will go towards the higher interest rather than the capital, so you wouldn’t be paying off your mortgage more quickly.
If you’re on your lender’s SVR, you need to be comfortable with the risk of your monthly mortgage payments going up if the rate changes.
You would also need to be able to cover the higher payments - our mortgage interest calculator can help you work this out. If you’re unable to keep up repayments on your mortgage, your home could be repossessed by your lender.
Should I stay on the SVR?
Generally, you’ll pay more on a lender’s SVR than on a fixed-term deal. So, if your deal is coming to an end, you could consider remortgaging to a new deal.
On the other hand, SVR mortgages tend to offer more flexibility if you plan to remortgage or move house in the near future, as you’re unlikely to face an Early Repayment Charge - a penalty for repaying your loan sooner than the term.
How is the standard variable rate set?
A lender can raise or lower its SVR by any amount and at any time. As a borrower, you have no control over these changes.
Standard variable rates can be influenced by changes in the Bank of England's base rate, which rose to 0.75% in August 2018.
Often, if the base rate goes up, lenders will increase their SVR in the days and weeks after.
After the increase in the base rate from 0.25% to 0.5% in November 2017, around half of mortgage providers increased their SVR to existing customers by at least 0.24%. Some lenders, by contrast, reduced their SVR to attract more borrowers.
But the base rate is only one of several factors which a lender will take into account when setting their SVR - including the lender's cost of borrowing, risk management, and internal targets.
Pros of SVR mortgages
- SVR mortgages tend not to have an Early Repayment Charge, providing the flexibility to pay off your mortgage quicker or switch to a new mortgage deal without penalty.
- If your lender has a low SVR, your monthly repayments will also be comparatively low.
Cons of SVR mortgages
- The SVR is set by your lender, and may go up or down at their discretion, at any time. This means that your monthly repayments could also go up or down at any time.
- If your monthly payments go up because of an increase in the SVR, you might find it difficult to meet the increased payments.
How much will I pay?
Standard variable rates can range from around 2-5% above the base rate.
Some lenders might have an SVR ‘ceiling’. For example, the lender might guarantee that their SVR won’t rise a certain percentage above the Bank of England’s base rate. There may also be a ‘collar’ on a standard variable rate mortgage, meaning that your interest rate cannot fall below a certain percentage.
If you’re on an SVR, it may be worth seeking advice from a mortgage broker, to see if you can get a lower interest rate by switching to a new mortgage deal.
- If you're thinking of re-mortgaging, Which? Mortgage Advisers can help you find the right deal for your circumstances.
Standard variable rate vs fixed-rate mortgages
A standard variable rate mortgage offers you flexibility, as you can generally remortgage or change lenders without facing a fee.
However, the amount you pay in interest each month can change, so you need to make sure you can afford the rate even if it increased in the future.
For certainty over your interest payments, you could instead opt for a fixed-rate mortgage, where your rate will be set for an agreed period (often two or five years).
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