What is a standard variable rate mortgage?
Each lender sets its own standard variable rate (SVR), and this is the default interest rate that you'll be charged if you don't remortgage.
Standard variable rates tend to be higher than the rates on other types of mortgage. For example, when we checked in January 2019, the average SVR was 4.9% according to Moneyfacts, while the average two-year fixed-rate deal cost just 2.52%.
Want to avoid paying the SVR?
Which? Mortgage Advisers can recommend the cheapest deal for your personal circumstances, and help you remortgage away from your lender's SVR.
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 could change each month.
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.
Within a month of the August 2018 base rate increase from 0.5% to 0.75%, 43 out of 87 mortgage providers increased their SVR to existing customers by at least 0.25%.
But the base rate is only one of several factors which a lender will take into account when setting its SVR - including the lender's cost of borrowing, risk management, and internal targets.
Pros and cons of SVR mortgages
SVR mortgages: the pros
- 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.
SVR mortgages: the cons
- Standard variable rates are usually higher than the rates offered by other types of mortgage. In January 2019, the average SVR was 4.9%, compared to 2.52% for a two-year fixed-rate mortgage. This can mean paying thousands more than you need to.
- Your lender can choose to change its SVR at any time. This can mean your monthly repayments could suddenly increase without warning.
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 remortgaging, Which? Mortgage Advisers can help you find the right deal for your circumstances. You can call for a free consultation on 0800 197 8461.
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 increases 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).
Our mortgage repayment calculator lets you see how much your monthly payments could be affected by a rate change.
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