The standard variable rate (SVR) is the rate normally charged when the fixed or discounted period on your mortgage deal ends. For example, if you had chosen a two-year fixed-rate mortgage, after those two years, you'd be put on your lender's SVR. Typically the SVR can be 1% to 2% above the base rate.
Lenders often change their SVRs after the Bank of England base rate has moved. But SVRs are not like tracker mortgages – they only change at the lender's discretion and may not go in the same direction as the base rate.
Whether or not lenders increase or decrease their SVR also depends on the LIBOR (London Interbank Offered Rate) rate. This is the average interest rate that major banks in London charge when lending to other banks. If the LIBOR rate goes up, it becomes more expensive for lenders to borrow money and as a result, lenders pass this onto their customers through higher SVRs.
Unfortunately, it doesn't always work the other way round. So if base rate and the LIBOR rate goes down, lenders may not pass through the full decrease to their customers.
Because interest rates have been so low for the past few years, SVRs have actually been fairly competitive. In the past, if you moved off your mortgage deal onto the lender's SVR, you'd need to switch to a better mortgage deal immediately or face paying out far more for your monthly mortgage repayments. But since base rate has remained low, many borrowers have decided to stay on the SVR rather than remortgage because rates can be cheaper.
However, the problem with an SVR is that it could increase by more than any changes in the base rate, so they can be unpredictable and may be unaffordable in the end. For example, if base rate rose 1%, your lender might push up the SVR by 2%. So if you were on a rate of 4%, you could find yourself suddenly on a rate of 6%.
EXAMPLE - How the SVR can change
You have a £150,000 mortgage on an SVR of 4%.
Over a 25 year term, your monthly repayments would be £792.
But if your SVR jumped to 5%, you'd have to pay £877 a month – that's £85 a month more or £1,020 over a year.
And if your SVR rose even further to 6%, your repayments would go up to £966 a month – that's £174 more a month more and £2,088 a year.
Therefore borrowers who are not confident they could afford big increases in their monthly repayments should not stay on the SVR and instead, should consider moving to a fixed-rate mortgage.
But even if you can afford increases in your repayments and even though SVRs have been fairly competitive over the past couple of years, that doesn't mean you should simply stay on your lender's SVR without shopping around to see if there is a better mortgage deal out there for you. Interest rates on mortgages are at historically low levels and as a result, it's the perfect time for snapping up a good deal. If you'd prefer the certainty of a fixed-rate mortgage, you can lock into a low rate fixed deal and not worry about your repayments changing for the duration of the mortgage deal. Alternatively, if you're happy to take some risk, you could get a much lower rate of interest with a tracker deal.
The example below shows why it can pay to compare deals and move to a better mortgage.
EXAMPLE – Why it may not pay to stay on the SVR
You are coming to an end of a deal with £175,000 left on your mortgage. Your lender puts you on its SVR charging 5%
If you stay on this, your repayments will be £1,023 if repaying capital and interest.
However, if you remortgage to a new fixed-rate deal offering 3%, your monthly cost will be £830
This represents a monthly saving of £193 or a total saving of £4,632 if the deal is for two years.
Even if the new deal comes with a product fee of £999, you still stand to save £3,633 over two years.
Don't forget that if you do move off your lender's SVR and onto a new mortgage deal, you will need to pay mortgage fees. But even so, it can still work out to be cheaper than if you had simply stayed on the SVR.