There’s more to think about when buying a house than simply how many bedrooms it has or if the garden is south-facing.
Perhaps your most important consideration is how much you can afford to spend and where the money will come from – which is when it pays to know the advantages and disadvantages of the different types of mortgage on the market.
That’s where we come in; we’ve already taken you through the finer points of both the fixed-rate mortgage and the tracker mortgage. And in this blog we’re looking at the Standard Variable Rate (SVR) mortgage. Whether you’re a buyer or your current mortgage deal is coming to an end, the SVR is a mortgage you should be familiar with. To find out why, read our guide:
How does the SVR work?
Like the tracker mortgage, the SVR is a variable rate mortgage, which means it works just like it says on the tin – the amount you pay varies. However, that’s pretty much where the similarities end.
While a tracker mortgage rises and falls with the Bank of England’s base rate and is set at a specified amount either above or below it, an SVR is set by your lender – and they can put it up or down whenever they want. So, while a change to the base rate means your mortgage repayments will also change, this is not always the case if you’re on an SVR mortgage.
Another important thing to know about the SVR mortgage is that it’s the mortgage you’ll probably end up on once your tracker or fixed mortgage deal comes to an end. You can choose to either stay on it, speak to your lender about switching to a different product, or shop the market for a new deal with a new lender, but before you make that decision you should know about the pros and cons of sticking with an SVR.
Advantages of an SVR
If you choose an SVR mortgage, you may find that the arrangement fee – if there is one – is lower than that attached to a fixed or tracker mortgage. And because the SVR is what you tend to automatically switch to once your initial mortgage deal comes to an end, there aren’t usually any early repayment penalties, which means you can overpay or remortgage without worrying about being penalised.
As with a tracker mortgage, an SVR can pass on the benefits of low interest rates to you, which a fixed-rate mortgage can’t (because your repayments are fixed). So, if the Bank of England’s Monetary Policy Committee votes to reduce the base rate, your lender can pass this saving on to you.
Disadvantages of an SVR
Which brings us neatly on to the disadvantages of signing up to or sticking with an SVR mortgage: your mortgage provider is under no obligation whatsoever to pass on any interest rate falls to you. While a tracker will follow the base rate, which means that if it falls your repayments will too, it is up to the lender whether they reduce their SVR if the base rate goes down.
If the base rate goes up your SVR won’t necessarily increase, but it may well do – it’s all up to the lender. If they do decide to increase it, they may do so by more, or less, than the amount that the base rate increased by. They could even decide to increase their SVR even if the base rate hasn’t changed. This means you don’t have the security you do with a fixed-rate mortgage that your repayments will remain the same from month-to-month for the duration of your mortgage deal.
Another drawback of the SVR mortgage is that, for the most part, they tend to be among the most expensive deals available. Back when the base rate was higher, it might have offered you a saving over a fixed-rate mortgage, but with the Bank of England’s interest rates so low this is no longer always the case. And an SVR will almost certainly be higher than a tracker mortgage.
Should you stay on an SVR?
If you’re on an introductory fixed, tracker or discount mortgage, it’s likely that once this deal ends you’ll automatically transfer to your lender’s SVR. It’s therefore likely that if you have a mortgage, at some point or another you’ll need to decide whether to stick with your lender’s own rate or switch to something new.
As your current mortgage deal nears its end, it’s worth using a mortgage calculator to work out what your monthly repayments will be on your lender’s SVR. As base rates have been low for seven years, if you are coming off a discounted, tracker or fixed rate it is quite likely that your payments will increase when you move to the SVR.
You are under no obligation to stick with an SVR once your mortgage transfers to this. You can arrange a meeting with your mortgage lender to discuss their other offers, or approach a mortgage broker, such as Ocean, and see what’s available elsewhere on the market. And if you’d like more information on mortgages, read our handy guide.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.