Ask Our Expert

Should I stick with my lender’s SVR?

Dear Chris,

My building society has just written to me saying it will be hiking my SVR to 4.95% in March.

Is this still a competitive rate?

Should I stick with my current mortgage or could I switch to a better deal?

Best wishes,

Sue, via email on 26 January 2010

Our money expert says...

In the past, mortgage lenders’ standard variable rates (SVRs) have not been very competitive. Because of this borrowers have been encouraged to switch to a better deal as soon as their current deal period ends, rather than revert to the SVR.

Historically low SVRs

However, when the Bank of England base rate was cut from 5% to 0.5% between October 2008 and March 2009, many lenders were forced - by their own terms and conditions - to lower their SVRs accordingly.

This has led to an unusual situation, where some lenders’ SVRs are the cheapest rates on the market. For example, existing mortgage customers with Nationwide are benefiting from an SVR of just 2.5%, once their deal period ends.

Unsurprisingly, this has led many people to remain on their lender’s SVR, rather than switch to a new deal.

SVR rates are rising

As you have seen, mortgage lenders are now starting to increase their SVRs. Some are unable to do this, but others are invoking clauses which allow them to remove their SVR ceilings under exceptional circumstances.

Earlier this month, Moneyfacts.co.uk reported that eight mortgage providers had increased their SVRs since last April, despite the base rate remaining stable at 0.5%.

Darren Cook, spokesperson for Moneyfacts.co.uk, explained: “By increasing the SVR, lenders are actively trying to encourage borrowers to find a new mortgage deal.”

He warned: “Now that a few lenders have taken the step, it is highly possible others will follow.”

News: Mortgage lenders hike standard variable rates

Should I switch?

Your new SVR rate is still fairly competitive – other SVRs range from 2.5% to 6.45% - however, you may be able to get a better deal by remortgaging.

Which deal will be best for you depends on your circumstances. For example, if you have a fair amount of equity in your house, you may find it easy to secure a competitive new tracker or even a fixed-rate mortgage at a lower rate than you’re currently paying.

However, if you have little equity, you may not be eligible for a better deal, and may be best sticking with your current SVR. Plus, if you only have a small mortgage left, you may be better sticking with your SVR as the fees involved in remortgaging may wipe out any gains you make from securing a lower interest rate.

I would strongly recommend you contact a whole-of-market mortgage broker who will be able to talk through your options and offer advice tailored to your individual circumstances.

News: Small mortgage? Sit tight on your SVR

The base rate will rise

One important factor to consider when deciding whether or not to switch, is the base rate. Inevitably it will rise at some point in the future, and if you decide to stay on your lender’s SVR you should be prepared for this to rise too.

Experts are divided on when the base rate will be rise, with some predicting the first increase to happen by April, while others are forecasting low rates to continue well into 2011 and even for longer.

If you would struggle to cope with a sudden increase in your mortgage rate, you may be swayed towards paying a premium to fix your mortgage rate now. This is something you should discuss with your mortgage broker.