Mortgage Guides

SVRs - Standard variable mortgage rates explained

By Seamour Rathore seamour@consumerchoices.co.uk

This guide explains the basics of standard variable rates (SVRs) and looks at how they have been affected by the credit crunch. (Updated 15/2/10)

An SVR or standard variable rate is a mortgage lender’s basic lending rate – and they can set it at any level they choose. For this reason, SVRs can vary massively - at the moment those from high street names range from 2.5% to 6.45%.

When looking for a mortgage or remortgaging, you’re likely to look for the best introductory deal for you. That’s often going to be a product that gives you a fixed-rate or a tracker deal for the first few years. But once your deal period ends you’ll usually be reverted automatically onto your lender’s standard variable rate (SVR).

Reaching the end of your introductory deal and being moved onto your lender’s standard variable rate used to be the trigger to look for a new mortgage deal. But some SVRs are now the best mortgage rates on the market.

This guide will give you the basics you need to understand standard variable rates. It will also explain how the credit crunch has affected SVRs, and why it is now much more important to understand how they work.

• What is an SVR?
• Why are some lenders not passing on cuts to the SVR when the base rate is cut?
• When are SVRs used?
• SVR recommendations

What is an SVR?

A standard variable rate (SVR) is the basic rate of interest a mortgage provider will charge. As the name implies, they are variable.

Standard variable rates are traditionally coupled with the Bank of England base rate, but set around 1-2% above it. However, the key thing to remember is that SVRs are discretionary – it’s entirely up to lenders what rate they adopt, and they do not have to pass on base rate cuts.

For example, if the Bank of England base rate is 4%, the lender’s SVR would tend to be set at around 5-6%. As a result of the coupling, the general rule was when the base rate went down, lenders’ SVRs went down, and when the base rate went up, so did the SVRs. This was the general rule but not always the case.

However, the low interest rate environment of the last year, in many cases there has been a “decoupling” or breakdown in the relationship between the base rate and the SVR. Some lenders have kept their SVRs at much higher levels and the gap between the current base rate of 0.5% and some SVRs can be as high as 6%.

Why are some lenders failing to pass on the base rate cut in their SVRs?

SVRs have varied widely since the base rate was cut to 0.5% in March 2009. Some lenders have offered SVRs as low as 2.5% while others have remained at around the 6% mark.

The main reason some lenders, particularly building societies, are not cutting their SVRs - or have put them up in recent months - is that they need to protect savers’ returns as much as they can in the current low interest rate environment.

When are SVRs used?

Standard variable rates are most commonly used in two situations; when an introductory deal has ended and, in some instances, for the entire life of the mortgage.

At the end of an introductory deal:

The most likely time you’ll come across an SVR is when your introductory mortgage rate reverts to the SVR. For example, if you’ve taken out a two-year fixed deal which reverts to the lenders’ SVR once the initial two years are over, then your payments will change to reflect the lender's current standard variable rate.

It’s important to remember that whatever SVR is quoted in your illustration when you take out a mortgage, the rate will probably have changed by the time you move on to it. Lenders publish their current SVR on their websites, so make sure you know what rate you’re moving on to.

Entire life of a mortgage:

SVRs can also be used as the rate for the entire term of the mortgage. There are various occasions when this may be desirable:

• When the SVR is so attractive that borrowers are happy to have a mortgage based on it from the outset
• When a homeowner is taking out an additional mortgage loan, sometimes known as a homeowner loan, and doesn’t want to pay a fee for a special fixed-rate or tracker deal
• When the borrower doesn’t want to be stung by initial arrangement fees and early redemption penalties, for instance if they plan to sell the house in the short-term.

SVR recommendations

If you are coming to the end of your fixed-rate period or introductory deal and are due to be put on your lender’s SVR, you should check what level this is at. It is also useful to check with your lender what their policy is for changes to the SVR.

You may find that your lender’s SVR is so low that the new rate you are paying is less than when you were still on your deal. Many people are currently opting not to look for a new deal, and are content to stay on their lender’s SVR for now. If you plan to do this, there are several things you should check:

1. Redemption penalties – Make sure you know if you are still subject to early redemption penalties. Redemption penalties often only last for the duration of the introductory period but they can last for longer. Check your paperwork to find out if you are now free to compare the market and see if you can switch to a better deal than your lender’s standard variable rate.
2. Historically low interest rates – The massive Bank of England base rate cuts since October 2008 mean that many SVRs are now lower than many lenders’ introductory deals. This means that, unusually, the SVR can be the best rate available from your lender at the present time.
3. Future interest rate rises – While it may seem attractive to stay on your lender’s SVR at the moment, the pricing and availability of other types of mortgages i.e. fixed-rates and trackers is changing all the time. As we are at (or at least very near) the lowest interest rates can go, for some people it may be best to lock-in a fixed-rate deal soon. Otherwise, if you find your SVR rising you may be rushed into taking a less attractive deal at some point in the future.

If you only consider switching once rates are moving up, it means you will have less bargaining power when it comes to securing a good deal.

You should examine your options and talk to an independent financial adviser. In addition you should compare mortgages to find out more about the best deals available.

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