When you first take out a mortgage, you will likely be on a time-specific deal. This may be two years, three years, or even five years. During this time frame, your interest rate will be the pre-agreed interest rate set when you took out the mortgage. But what happens after your mortgage deal has expired?
When you come to the end of your fixed-term mortgage deal, you will likely be automatically put onto your lenders’ Standard Variable Rate. This is also known as an SVR. It is the default interest rate set by your mortgage lender.
But what does it really mean? Could moving to an SVR have a significant impact on your monthly repayments? And what are the advantages and disadvantages of being on a standard variable rate?
Let’s find out.
What is a standard variable rate?
As mentioned, a standard variable rate is the default interest rate that banks and building societies use when a mortgage holder comes to the end of a fixed-term deal.
It’s important to be aware of the difference between a mortgage term and a mortgage deal.
A mortgage term is the lifespan of the entirety of your mortgage. Therefore, your mortgage term will dictate how many years it will take you to pay off the entire balance of your mortgage. Often, consumers choose to start with 25 or even 35-year mortgage terms.
A mortgage deal is the pre-agreed interest rate set for a specific timeframe. Mortgage deals are often two, three, or even five years. Once your pre-agreed mortgage deal expires, you will revert to the standard variable rate for the remainder of your mortgage term. However, you may choose to remortgage to another deal.
How do standard variable rates work?
SVRs are variable rates of interest. They are set by the individual mortgage lender. Some mortgage providers may choose to follow any changes from the Bank of England’s base rate. Others may consider other reasons to raise or lower an SVR at their own discretion, such as the cost of borrowing.
Standard variable rate mortgages differ from fixed-term mortgage deals because there is no pre-agreed interest rate.
The lender can choose to change its SVR at any time they like.
Your mortgage payments could change each month because a proportion of your mortgage payment goes towards repaying the interest on your loan.
If your lender chooses to increase its SVR, your monthly mortgage repayments will increase if you are not tied into a fixed-term deal. The extra payments will not repay any of the capital any quicker. Instead, it will solely repay the interest. This means that you will be paying more money per month without reducing your mortgage balance.
Is it possible to prepare for an interest rate rise?
If you are on a fixed-term tracker mortgage, you will know that your mortgage repayments could rise in line with the Bank of England base rate. Before signing your deal, you will likely have discussed plans to cope with any mortgage changes with your mortgage adviser. As part of your tracker deal, you can have the assurance that your mortgage will only increase by a certain percentage.
However, if you are on a standard variable rate mortgage, you will have no reassurances over any possible interest changes. Therefore, you may need to think carefully about whether your budget could cope with any mortgage repayment increases.
A helpful tip is to plan ahead.
If you know that you are coming to the end of a fixed-term mortgage deal, you should have a look at your lender’s current SVR. There are numerous mortgage calculators freely available online. These calculators could help you to see how the switch could impact your mortgage payments. A mortgage calculator will not only confirm your monthly payments, but you can see how they could change the final amount repayable until the end of your mortgage term.
You may decide that you prefer the safety of a fixed-term mortgage deal. In which case, you should speak to a member of the Mortgagemove team. We can help you find a competitive remortgage deal that will fit in with your preferred mortgage term and align with your existing monthly repayments.
What are the advantages of being on a standard variable rate mortgage?
There are a few scenarios where it could be advantageous to be on a standard variable rate mortgage.
- If you choose to start with an SVR rather than agreeing to a fixed-term deal, you may find that arrangement fees are lower.
- You can choose to make repayments over and above your agreed rate. Most fixed-deals will have stipulations that you can only make overpayments of up to 10% of your mortgage balance each year. If you are on a standard variable rate and you have unexpectedly come into some money, you’ve had a pay rise, or you simply want to reduce your mortgage balance quicker, then you can make these payments without any financial penalties.
- If you plan to move house, or you want to remortgage to a new deal, you are not tied into any lengthy terms or subject to any early repayment charges. In addition, you have added flexibility, which means you can easily change mortgage deals at any time.
- If the mortgage lender reduces their standard variable rate, you may benefit from lower mortgage repayments.
What are the disadvantages of being on a standard variable rate mortgage?
If we mention the advantages of standard variable rate mortgages, we should also point out the drawbacks.
- SVR mortgages are not competitive. They will almost certainly be significantly higher than a fixed rate deal, which will mean that you are paying more on your monthly payments without the benefit of reducing your mortgage capital. As an example, HSBC currently offers a two-year fixed rate of 0.89% to existing mortgage customers. However, if the customer chooses not to remortgage at the end of the two years, they will revert to a 3.54% standard variable interest rate for the remainder of their mortgage term. This could mean paying hundreds or even thousands of pounds more than you need to.
- We’ve already mentioned that if the lender changes their standard variable rate, you could benefit from lower mortgage repayments, but the opposite is also true. The lender could choose to raise their SVR with no notice, resulting in higher monthly mortgage repayments. Your home may be repossessed if you do not keep up with the higher repayments on your mortgage.
- What’s more, if there is any economic instability, or you have chosen to remain on the standard variable rate for the remainder of your mortgage term, it’s likely that your lender will repeatedly assess their SVR. Any fluctuations in the rate could make it increasingly difficult for you to manage your budget.
We can help you understand how your SVR could impact your monthly mortgage payments
Customers come to us because they know that we will always explain in full how reverting to a standard variable rate mortgage will impact your monthly payments.
Our experienced mortgage advisers will help you to find the best possible fixed-term mortgage deals. We will also explain clearly what will happen when your current mortgage deal expires. We want our customers to feel empowered that they understand the implications of long-term mortgage terms.
It’s why many of our customers come back to us as they near the end of their fixed-term mortgage deals. They know that we are here to help them remortgage quickly and easily. With access to a UK-wide network of mortgage lenders, we are confident that we can reduce your monthly repayments. We may even be able to find you a competitive deal that reduces your overall mortgage term.
To find out more about how we can help you, please call our freephone mortgage advice line on 0333 005 0333. Alternatively, please text ADVICE to 82228.
Your home may be repossessed if you do not keep up repayments on your mortgage.