If you are one of the many borrowers due to remortgage this year you may already have investigated SVRs – or standard variable rates, to give them their full title.
Every single lender has a standard variable rate and they all – well – vary. They are the most simple and straightforward mortgage rate your lender will offer and they come with no fees, charges, offers or perks.
When borrowers finish their introductory mortgage deal, if they don’t remortgage, they will default to the SVR. It enables them to continue making repayments with interest.
And here lies the problem – which is the interest rates are typically much higher than for a new deal. In fact, it’s likely it will be the highest rate your lender will offer.
Yet, it’s easy to see how many people end up paying an SVR.
For some, it may just be a matter of forgetting to remortgage or not understanding their mortgage options.
It’s a bit like the scenario which kicks in when your broadband deal expires and you haven’t found a new tariff. But this can easily be remedied by remortgaging.
There are others who use their SVR for more practical reasons – they may be planning to move in a few months, so there’s no point in renewing mortgage deals, for example.
It’s also the rate many mortgage prisoners – those who cannot remortgage – must pay.
But at the moment there is another group of borrowers who are eyeing up the SVR because they are nervous about the cost of remortgaging. Indeed, over the last year mortgage rates have soared, with the average two-year fix climbing from 2.58% in April 2021 to 5.35% today, according to Moneyfacts.
It’s no wonder there are borrowers who are reluctant to commit to a fixed rate when mortgage rates are more than double what they were when they signed up to their current deal.
If you are in this boat, an SVR is an attractive prospect as it offers flexibility and no early repayment charges. So, if rates fall, you can pounce with no penalty – something you won’t achieve on a fixed-rate mortgage.
To illustrate just how interested people are in SVRs, mortgage broker John Charcol said Google searches for the term ‘SVR mortgage’ have increased 193% since last year.
There are clearly some pros and cons of using your SVR. But, whether it’s the right mortgage option for you depends very much on your circumstances.
For this reason, it’s certainly worth going through the numbers and other practicalities with a broker.
But in the meantime, we’ve put forward a few things for you to consider.
Check out the price of your lender’s SVR
As mentioned, SVRs can vary from lender to lender. But they are also rising in line with the Bank of England base rate.
According to mortgage broker, John Charcol, there appears to be a ‘significant disparity, in what mainstream lenders are charging their customers for SVRs.
For example, at the time of writing (April 2023), the lowest SVR was 5.19% from the Newcastle Building Society, while the highest is 8.24% from Virgin Money. As a mid-point, Barclays SVR is 7.74%.
Nicholas Mendes, mortgage technical manager, at John Charcol said several building societies have SVRs between 6% and 7%.
Meanwhile, the average SVR, data from Moneyfacts revealed this week, was currently 7.30% – this is the highest point the typical SVR has reached since February 2008.
Currently the average two-year fixed rate mortgage is 5.35% whilst a two-year tracker mortgage is 5.02%.
SVRs can change – they usually go up or down with the Bank of England base rate
It’s worth considering, if you are reverting to your lender’s SVR, that the rate is subject to change.
Mendes pointed out, if the Bank of England increases its base rate, then lenders may increase their SVR accordingly.
However, he also added, it’s important to note that because the lender can set their SVR at whatever level they like. They can also increase or decrease it by whatever margin they choose, even if it’s not necessarily in direct line with any change from the Bank of England.
It’s impossible to predict what will happen to interest rates. The Bank of England is currently raising rates in a bid to counter inflation which is still in double figures – so this factor, alone, is raising the odds of more rises.
But how much higher could SVRs potentially go?
Mendes said there may well be a limit. “When Consumer Duty [the new standards of consumer protection] comes into effect on August 1st this year, the financial Conduct Authority (FCA) will be looking at outliers and so any lender with an SVR well above the norm will need to be able to justify it to the FCA,” he added.
Ultimately, the SVR is uncertain and you’ll need to keep track of its movements if you decide to go down this route.
Look at the other options
If you are making a conscious decision to sit on your SVR until interest rates come down, it is a good idea to check out what other options are available too.
Gemma Bennett, a senior mortgage broker for The Mortgage Mum, said in a recent podcast with What Mortgage, there are variety of other, cheaper avenues, which could also be more flexible.
A two-year fixed rate may be more expensive than the rate you are currently on, but it will give you the ‘comfort of knowing your budget’ plus you can review it in two years’ time.
She also suggested looking at tracker mortgages or discounted variables – there are options which don’t have early repayment charges and you may even find one with your current lender, to save the hassle of a full remortgage.
“There are options out there that can keep that flexibility,” said Bennett, “where you can still have a look and see what’s happening in six months’ time and change, but which won’t be as expensive as the SVR.”
Get advice from a broker
If you are due to remortgage and considering doing nothing and thereby defaulting to the SVR, it may still be a good idea to speak to a broker to get some advice on how the numbers may affect your budget. Equally, they may be able to walk you through some of the options mentioned above.
Rachel Springall, finance expert at Moneyfacts.co.uk, said with times so uncertain, advice was highly recommended.
“The Bank of England base rate rose again last month to now stand at 4.25%, and our average SVR has now hit 7.30%, its highest rate since February 2008,” she said.
“The average two-year tracker deal rate has also risen and breached 5% for the first time in over 14 years.
“Borrowers comparing both rates and the overall mortgage packages would be wise to seek independent financial advice to assess the true cost of any deal, and to ensure it’s the right time for them to refinance.”
