Is a standard variable mortgage appropriate for you? It depends on your individual circumstances, but here are some things to consider:
- Your financial stability: If you have a steady income and can afford to see your monthly mortgage payments fluctuate, then a standard variable mortgage may be a good option for you.
- Your risk tolerance: Standard variable mortgages are more risky than fixed-rate mortgages because your monthly payments can go up or down, depending on the lender’s rate. If you’re not comfortable with this level of uncertainty, then a fixed-rate mortgage may be a better choice.
- Your plans for the future: If you’re planning to sell your home in the near future, or if you expect your income to change significantly, then a standard variable mortgage may be a good option for you because it offers more flexibility than fixed-rate mortgages.
One of the critical features of your mortgage is the rate at which you pay interest on the loan. The rate can vary widely – and, in so doing, make the difference between a mortgage payment where you have to spend or are able to save many thousands of pounds over the life of the mortgage.
Mortgage interest rates are determined in several different ways, and probably the most common is the so-called standard variable rateThe interest rate charged by the lender that can vary over t.... What does the term mean and is it likely to be the appropriate mortgage for your own needs and financial situation? In this article, we will discuss this in detail.
What is a standard variable rate mortgage?
A standard variable rate mortgage provides the basic model on which mortgage lenders advance their loans. Some people may refer to it as an adjustable-rate mortgage.
It is a standard rate because that is the baseline to which the lender’s practices will always return in the absence of some other rate of interest – it is their default rate of interest, in other words. In the words of the Money Advice Service, it is the “normal” rate of interest which any lender charges a homebuyer for their mortgage – unless a different type of mortgage is arranged.
It is a variable rate because it may vary over time, according to decisions made by the mortgage lender. Each lender may have a different standard variable rate and those rates may change independently from one lender to another.
For many borrowers, the mortgage lender’s standard variable rate (or SVR as it is often known) is the default rate of interest to which they will be transferred when a fixed-rate mortgage, a tracker mortgage or a discounted mortgage comes to an end.
For that reason, a standard variable rate mortgage is also sometimes known as a reversion-rate mortgage, explains a guide published by Which? magazine in April 2020.
How does a standard variable rate mortgage work?
To understand how a standard variable rate mortgage works, it might be helpful to remind ourselves of the principles behind your home loan monthly payment.
Part of what you pay goes towards repayment of the capital amount you borrowed; part of it pays the interest on the outstanding mortgage balance (what you continue to owe).
If the interest rate changes – as a standard variable mortgage rate is going to do – then your monthly payment must increase to cover that higher rate of interest, even though you are not reducing the outstanding balance of your mortgage.
The mortgage loan lender decides when and by how much it is going to increase or lower the rate of interest. Typically, it does so after there has been some change in the Bank of England’s base rate – and it might be worth reviewing the Bank’s explanation of interest rates in general and its role in setting the base rateThe interest rate set by the Bank of England, affects the in....
Changes in the base rate, however, only give a broad indication of your lender’s setting of its standard variable rate of interest. There may be a delay before the lender responds, for example, or the lender may decide upon a reduction or increase in the rate that is different from any change in the base rate.
Unlike a tracker mortgage, for instance, the standard variable rate does not exactly shadow movements in the Bank of England base rate.
What is better – a fixed rate or variable rate mortgage?
The reason why this is a difficult question to answer is that it all depends on the fixed rate you are offered, for how long that deal lasts, and how your particular mortgage lender varies its standard variable rate.
The Bank of England has maintained its base rate at 5.25% in September 2023, the 14th consecutive rise. This means that the average variable rate charged by mortgage home loan lenders is likely to remain high.
It is still a gamble whether a variable rate mortgage is a good choice for you. The Bank of England base rate or the average variable rate charged by mortgage home loan lenders may still go up or down and, depending on the fixed rate of interest you were offered, you may end up being relatively worse – or better – off.
For example, if you had a fixed-rate mortgage at 2.52% in 2018, and it came to an end in July 2020, you would have faced an unwelcome 2% jump in the interest rate you had to pay if you switched to your lender’s standard variable rate (SVR) at that time. The average SVR mortgage rate in July 2020 was 4.46%.
Today, in September 2023, the average SVR mortgage rate is 8.49%, so borrowers who switched to their lender’s SVR in July 2020 would have faced a much larger jump in their interest rate of around 4%.
If you are considering a variable-rate mortgage, it is important to understand the risks involved. Your interest rate could go up, which would mean that your monthly mortgage repayments would increase. This could make it difficult to afford your mortgage, especially if you are on a tight budget.
If you are not comfortable with the risk of your interest rate going up, you may be better off with a fixed-rate mortgage. With a fixed-rate mortgage, your interest rate will remain the same for the fixed-rate period, which could be anywhere from two to five years. This gives you certainty and peace of mind, knowing that your monthly mortgage repayments will stay the same.
Which type of mortgage is right for you will depend on your individual circumstances and risk appetite. If you are looking for certainty and peace of mind, a fixed-rate mortgage may be a better option for you. If you are comfortable with the risk of your interest rate going up, you may be able to save money by opting for a variable-rate mortgage.
It is important to compare mortgage rates from different lenders before you choose a mortgage. You can use a mortgage comparison website to help you do this. We would also suggest you contact a specialist mortgage broker to help you with your mortgage application.
What are the pros and cons of a variable rate mortgage?
This reasoning helps to explain some of the pros and cons of a variable-rate mortgage. If you are prepared to take the risk of interest rates staying the same or falling, then your monthly payment for your mortgage may be lower than if you were on a fixed-rate mortgage deal.
Mortgage lenders are aware that you are taking such a risk – so may be prepared to offer a lower rate of interest on a standard variable rate than it is at that time prepared to offer on a fixed-rate deal.
In practice, of course, it will remain exceedingly difficult to predict whether an average mortgage rate will be falling or rising – you must bear the risk of the potentially significant financial consequences of such a movement.
Why do some variable mortgages have a ‘collar’?
To protect yourself against especially big increases in a mortgage rate, you might opt for a variable-rate mortgage that has a built-in “cap”. With this, the lender sets a maximum rate of interest above which your mortgage will not rise.
The flip-side of that coin is described by the Money Saving Expert in a posting dated the 15th of September 2020. This explains how mortgage lenders, too, have sought to reduce the risks to which they may be exposed through a falling average mortgage rate. It gave the example of a massive movement in the Bank of England base rate from 5.75% down to just 0.5% in the period between July 2008 and March 2010.
Without a “collar” to define the minimum interest rate to which mortgages could fall, lenders could have been hit by considerable losses as rates did indeed drop so spectacularly.
If you opt for a standard variable rate mortgage, therefore, you might want to establish whether the lender offers either an interest rate cap (on the maximum rate you might pay) or impose a collar (on the minimum rate of interest you pay).
Because standard variable rate mortgages have both their pros and cons, it may make sense to discuss your home loan options with a mortgage broker. They have the expertise to help you make the most appropriate decision for you.
Once you have decided to take the plunge and go for a standard variable-rate mortgage, it is important to shop around and compare rates from different lenders. This will ensure that you get the best deal available and can save you money in the long run. It is also advisable to consult with a specialist mortgage broker who can help you understand all the terms and conditions of your loan before signing on the dotted line.
Frequently Asked Questions
Q1: What is a standard variable rate mortgage?
A1: A standard variable rate mortgage is a type of mortgage where the interest rate can change over time, based on decisions made by the mortgage lender. It’s often the default rate to which borrowers are transferred when other types of mortgage deals, like fixed-rate or tracker mortgages, come to an end.
Q2: How does a standard variable rate mortgage differ from a fixed-rate mortgage?
A2: In a fixed-rate mortgage, the interest rate remains the same for a set period of time, offering certainty in monthly repayments. In contrast, a standard variable rate mortgage has an interest rate that can fluctuate, affecting your monthly mortgage payment. Your choice between the two will depend on your risk tolerance and financial situation.
Q3: How is the base rate related to a standard variable rate mortgage?
A3: The base rate set by the Bank of England serves as a general indicator for mortgage lenders. However, each lender may adjust their standard variable rate independently of base rate movements. Unlike a tracker rateA type of mortgage with an interest rate that is set a certa... mortgage, a standard variable rate doesn’t directly follow the base rate.
Q4: What are repayment charges in the context of a variable rate mortgage?
A4: Repayment charges are fees that you may have to pay if you decide to pay off your mortgage early or switch to a different mortgage product before the end of your rate period. These charges can vary depending on your mortgage deal and lender’s terms.
Q5: What is a ‘collar’ in a variable rate mortgage?
A5: A ‘collar’ is a minimum interest rate set by the mortgage lender. It serves as a protective measure for the lender to minimise losses, especially when the base rate drops significantly. This means your variable interest rate will not go below this predetermined minimum rate.
Q6: How can a mortgage broker assist me in choosing the right type of mortgage?
A6: An experienced mortgage broker can offer mortgage advice tailored to your financial circumstance and potential benefits of different mortgage options. They can also help you navigate through various mortgage products and use mortgage calculators to estimate your monthly repayments.
Q7: What is a tracker mortgage deal?
A7: A tracker mortgage deal is a type of mortgage where the interest rate follows, or ‘tracks,’ the Bank of England’s base rate. Unlike a standard variable rate mortgage, the interest rate in a tracker mortgage is directly influenced by base rate movements.
Q8: What is an offset mortgageA mortgage where the borrower's savings are offset against t...?
A8: An offset mortgage allows you to link your mortgage with your savings account. The money in the savings account is used to reduce the mortgage balance for the purpose of calculating interest, potentially saving you thousands of pounds over the mortgage term.
Q9: What is an interest-only mortgage?
A9: In an interest-only mortgage, your monthly payment only covers the interest on the loan, not the capital. This means that you’ll need a separate financial planning strategy to pay off the loan amount at the end of the mortgage term.