The pros and cons of a Standard Variable Rate mortgage
The SVR is a baseline rate set by individual mortgage lenders. It’s not tied to the base rate which is set by the Bank of England. But it does tend to move up and down roughly in line with this, though ultimately is set at the lender’s discretion.
For borrowers coming to the end of their fixed deal, a tracker or discount mortgage, the SVR is the default rate applied.
It is usually higher than the mortgage fixed or discounted rate, depending on when the deal was taken out.
According to data site Moneyfacts, the average SVR stands at 6.84%, while the two-year fixed deal (all LTVs) comes in at 5.35%, 5.02% for a five-year deal and 4.96% for a 10-year mortgage deal.
In the aftermath of the disastrous mini Budget, fixed rate mortgage deals shot up and while some rushed to fix their rate, others sat on the sidelines, slipping into their SVR to ride out the storm as they waited for fixed rates to come down.
‘Wait and see approach’
David Hollingworth, associate director, communications, at L&C Mortgages, says: “The crazy increases in fixed rates following the mini Budget left many borrowers wondering what they should do. Although their inclination may have been to fix, the sheer pace of increase in fixed rates left them wondering whether they should wait.”
However, he adds that waiting to see what happens can carry risk.
“One of those risks can be to fall onto the lender’s SVR at the end of the current deal. The SVR is not generally open to new borrowers and is usually a rather higher rate than borrowers could switch to if they decided to remortgage or take another deal with their lender,” he says.
“However, the final quarter of last year saw fixed rates increase so much that borrowers may not have felt the same pain in moving to SVR. Deciding to sit tight on SVR therefore didn’t carry the jump in rate whilst leaving the borrower with one of the benefits of SVR,” Hollingworth adds.
Avoid Early Repayment Charges
That benefit is to leave the borrower free of Early Repayment Charges. If you’re tied into a mortgage deal, there are often big penalties for leaving early. As an example, Halifax launched a 10-year fixed rate mortgage deal at 3.99%, but it charged borrowers up to 6% of the outstanding balance to leave halfway through the term.
Hollingworth says moving onto an SVR gives some borrowers options, whether that may be to pay off a chunk of their mortgage or to redeem the mortgage and switch to a new deal, hopefully when rates have fallen further.
He says: “Whereas repaying a lump sum would usually need some care to be taken not to breach an overpayment limit and incur a penalty, SVR is unlikely to apply any limits at all.
“As a result, it gives borrowers a degree of flexibility that many standard deals would not. It could therefore suit those who are expecting to be able to repay a chunk of their mortgage that would be bigger than the typical 10% per annum that most deals allow.”
Small balance and term left
An SVR isn’t generally open to new borrowers, but for those reaching the end of their mortgage term, it can also be an option.
Hollingworth says: “Those who are reaching the very end of their mortgage term may find that it becomes less beneficial to shop around for a new rate as well. For example, there may only be a few years remaining on the mortgage and the balance may be very small.
“Some lenders will require at least five years remaining and apply a minimum mortgage amount for a remortgage (eg £25,000 minimum).
“In addition, any cost at all to switch deal may eat into any savings in interest on a small balance. It’s still worth seeing if there could be an option without any fees but SVR could suit a borrower hoping to get rid of the mortgage sooner rather than later.”
‘SVRs are pricey’
However, Hollingworth adds that although SVRs “may have had one of its few moments of appeal after the mini Budget”, interest rates continue to climb. Halifax and Nationwide both charge 7.49%.
At the same time, fixed rates have fallen with the top five-year rates dipping below 4% “so a wider gap has built up again”.
He says: “Consequently, SVR is not a place that most borrowers should get too comfortable with as it could be pricey. If they like the flexibility and are still happy with the fluctuation of a variable rate then a tracker deal could offer an alternative option at a better rate.
“Some trackers can be found without any ERC even during the tracker period which would allow bigger overpayments or a jump onto a fixed rate at a later stage if desired.”