Standard Variable Rate (SVR) Mortgages Explained

What is a standard variable rate?

Each lender sets their own standard variable rate (SVR) and this acts as their default interest rate. Usually, you’ll be automatically switched to your lender’s SVR when your introductory deal ends, such as one with a fixed, tracker or discount rate. This is unless you’ve already arranged a new deal to change to. You can, however, opt for a standard variable rate mortgage with some lenders without having a different type of mortgage first.

A lender’s SVR tends to be higher than other rates. This means that your monthly payments will increase compared with what you’ve been paying for your introductory deal. As a variable rate, the SVR can go up as well as down so your mortgage payments will go up and down accordingly. Your lender can decide to change their SVR at any time and by any amount. This makes it hard to predict and budget for.

While the Bank of England base rate determines the borrowing costs of lenders, your lender isn’t obliged to pass on any base rate changes to you via the SVR. Therefore, if the base rate is lowered, you won’t necessarily benefit from a decrease in the SVR and lower payments. If you don’t want to stay on a standard variable rate, then you can arrange a new deal with your current lender, called a product transfer, or remortgage with a new lender.

How does a standard variable rate mortgage work?

With a variable rate, a standard variable rate mortgage has an interest rate that can go up and down. Every lender has their own SVR and unlike tracker mortgages, which usually track the Bank of England base rate, a standard variable rate mortgage isn’t determined by changes to the base rate. Instead, each lender decides what their SVR is and changes it as and when they want to. A change to an SVR can be based on a number of factors, such as the cost of lending, the economic outlook and laws and regulations.

If the base rate changes and your lender wishes to pass the change on to you, that’s entirely up to them — they don’t have to. Therefore, if the base rate comes down, your SVR may not necessarily come down too. Likewise, if the base rate goes up, a lender may decide to increase the SVR by the same amount or increase it by a different amount. As lenders set their own rates and change them as needed, an SVR mortgage is unpredictable.

You need to ensure that you have adequate funds to accommodate increases in your interest rate. Even small increases can significantly impact the amount you pay. It’s important to understand that if the SVR increases, your higher monthly payments pay off a higher amount of interest. The higher payments won’t pay off any of the capital so you won’t reduce any of your mortgage loan.

Standard variable rate mortgages don’t usually come with early repayment charges. This means that you can make overpayments, repay your mortgage early or switch to another deal without being penalised financially. This can make an SVR mortgage an attractive option if you are planning to do any of these in the near future.

How long does a standard variable rate last?

With a standard variable rate mortgage, you’re not locked into a deal for a set term as you are with other mortgage types. For example, with a tracker mortgage, you usually choose a deal length of 2, 3 or 5 years, although longer terms are available, including lifetime tracker mortgages. With no fixed term for a standard variable rate mortgage, you can switch to a new deal whenever you want to without having to pay a hefty early repayment charge. Therefore, if the SVR starts to increase and you want to change to a better, more affordable deal, you can do so without incurring a penalty fee.

You can have a standard variable rate for the entire mortgage term if you want to. However, the higher interest rate can make this a very expensive option in the long run.

Do you have to stay on a standard variable rate?

There’s no need to stay on a standard variable rate once your current deal has ended. You can search for a new deal to switch to before your current one ends and arrange it in advance so that there’s no gap between them. This prevents you from being moved onto the lender’s SVR and having to pay the higher rate.

Usually, you are only switched to the lender’s SVR if you haven’t arranged a new deal when your fixed, tracker or discounted rate deal ends. If this happens and you don’t want to stay on the standard variable rate, you can either arrange a new deal with your current lender or remortgage with a new lender.

If you’re happy to remain on the standard variable rate, you can do so until your mortgage is repaid in full if you wish. As you’re not faced with an early repayment charge when you have this type of mortgage, it can make good financial sense to stay on this rate if you know that you’re going to move soon or be in a position to repay your mortgage early. For example, if you’ve nearly finished repaying your mortgage, it may not be cost-effective to remortgage and pay the associated costs.

Is it a good idea to switch or remortgage?

Whilst a standard variable rate can be ideal in some situations, there are some considerations that may make it better to change to a different deal. For a start, the interest rate is likely to be higher than other deals. Also, as a variable rate, your interest rate may unexpectedly go up, increasing your payments. As lenders can review their SVRs at any time, this type of mortgage rate is very unpredictable.

Bearing these factors in mind, it can make more sense to find a new deal if you’re not planning on moving home or repaying your mortgage soon. With a lower rate than your lender’s SVR, a new deal can save you money and you can benefit from lower monthly payments. There are two options for this — taking a product transfer with your current lender or remortgaging to a new lender.

Product transfer

When you switch to a new deal with your current lender, it’s called a product transfer. This is a quick and easy process as your lender has already approved you for a loan. There’s no need to pass new affordability and credit checks, have a valuation carried out or go through the underwriting process. Usually, you can arrange a product transfer by telephone or online.

Remortgage

With a remortgage, you change your current mortgage deal to a new one with a different lender. You may, for example, want to keep a variable element to your rate but have a bit more predictability with a tracker mortgage. Or you may prefer the stability of having a fixed rate mortgage. A remortgage can be appealing because as well as benefitting from a lower rate, you may be able to enjoy better terms and a lower loan-to-value (LTV) ratio. If you’ve built up equity in your property, you can also borrow more if you wish, such as to pay for home improvements, consolidate some debts or make a big purchase.

A remortgage takes longer to arrange than a product transfer. This is because the new lender will need to carry out affordability checks, check your credit rating and arrange for a valuation to be carried out on your property. A solicitor or conveyancer will also need to handle the legal aspect of the remortgage.     

The advantages of a standard variable rate mortgage

There are various advantages to having a standard variable rate mortgage, as detailed below.

• No set deal term. With a standard variable rate mortgage, you’re not locked into a deal with a fixed term. This means that you can switch deals when you want to without having to pay an early repayment charge.
• Low or no fees. When taking out a standard variable rate mortgage, your lender will charge a low arrangement fee compared with other mortgage types. In fact, they may not charge you an arrangement fee at all.
• The possibility of a drop in the rate. If your lender lowers their SVR, your mortgage payments will decrease as a result.
• Flexibility to overpay or repay your mortgage. Lenders don’t usually charge an early repayment charge for SVR mortgages. This means that you can make overpayments as you wish or repay your mortgage loan early without being penalised.

The disadvantages of a standard variable rate mortgage

There are also disadvantages to consider before taking out a standard variable rate mortgage. These include:

• A higher interest rate. As SVRs are usually higher than other rates, you’ll pay more each month than you would with another type of mortgage. This also means that your mortgage loan will cost more in the long run.
• The risk of a rate increase. If your lender increases their SVR, your mortgage payments will go up as a result.
• Hard to budget. A rate change may happen at short notice as lenders can change their SVRs at any time. This can make it difficult to budget for your mortgage payments.
• The SVR is set by the lender. Each lender sets their own SVR as they wish, regardless of external rates. If the Bank of England base rate drops, therefore, your lender is under no obligation to pass on a decrease by lowering their SVR.
• You may be unable to move away from your lender’s SVR. If you have a small outstanding balance on your mortgage loan, such as £10,000, you may be unable to change from your lender’s SVR mortgage.

Is a standard variable rate mortgage right for you?

Whether or not a standard variable rate mortgage is right for you depends on your circumstances. Generally, as the interest rate is higher than other mortgage rates and it can change at any point, which is hard for budgeting purposes, switching to a new deal with your lender or remortgaging can be a better option.

However, this type of mortgage offers flexibility that you won’t find with other types. You can usually leave a standard variable rate mortgage without being penalised. This is handy if you’re moving home and haven’t been able to find a portable mortgage that you’re happy with. You can stay on a standard variable rate mortgage for a short term and then change to another deal when you’ve found one that’s right for you. Or you may wish to refinance and want more time to compare all of the options available to you. Again, paying your lender’s SVR offers a short-term solution. It allows you to carry out your plans when you’re ready without the worry of paying a costly fee.

You can also usually make overpayments or repay your mortgage early without incurring a hefty early repayment charge. If you’ve got some savings, are due for a bonus or know that you’re going to receive an inheritance, you can use the funds to pay off some or all of your mortgage without paying a penalty fee. Another reason that a standard variable rate mortgage may be right for you is if you only have a small balance left on your mortgage loan. In this case, it can be more cost-effective to stay on the lender’s SVR rather than paying the costs to remortgage.

Get expert advice on standard variable rate mortgages

Our mortgage brokers are here to help you decide if a standard variable rate mortgage is right for you. They can discuss your circumstances, assess your affordability and determine your attitude towards risk. These factors can help provide a clearer picture of whether a mortgage with a standard variable rate suits your needs or whether a fixed, tracker or discount mortgage is a better fit.

Once you’ve made an informed decision, they can compare the mortgage deals available. This includes the interest rates, terms and any fees the lenders may charge. That way, you’ll have a clear comparison between the deals to ensure you choose the best one for your needs.

To speak with one of our mortgage experts, call us on 01322 907 000. Alternatively, send an email to us at info@trinityfinance.co.uk or an enquiry via our contact form. We will reply to you as quickly as possible with more information. As well as arranging your mortgage, we offer other services to help with the home-buying process. These include putting mortgage protection in place and arranging your home insurance. We can also help safeguard you against the financial impact of unforeseen circumstances with protection that includes critical illness cover, income protection, life insurance and more.