When you take out a mortgage you’re faced with many options (fixed, tracker & discount rates), however one rate you will most likely find yourself on before the end of your term is the standard variable rate (SVR). Here is Response’s overview on the SVR.
What is the standard variable rate
A standard variable rate (SVR) is an interest rate set by your lender. It is the default interest rate that mortgage customers are moved onto when their initial deal ends. For example, if you take out a five-year fixed-rate mortgage with Leeds on 3.74% then after five years, if you don’t remortgage, you will be moved onto Leeds SVR, currently at 5.54.

In most cases the SVR can be substantially higher than the interest rate you were paying so your monthly repayments will rise. Because it is a variable rate your lender can also change the SVR at any time.

What are SVR mortgages?
A SVR mortgage is a home loan charging the lender’s standard variable rate of interest. Your lender can change the rate of interest on your mortgage whenever they like. If they increase it then your monthly repayments will go up and your mortgage will become more expensive.

Most people who have an SVR mortgage have been moved onto it automatically when their initial fixed or tracker rate mortgage deal ended. 48% of homeowners have never remortgaged meaning almost half of our countries homeowners are paying more interest than they need to.

Pros and cons of mortgages that are subject to SVR
Flexibility – Most SVR mortgages won’t have early repayment charges. This means you can overpay your mortgage or move lender easily without facing penalties.

Low fees – If you take out a mortgage which charges the lender’s SVR at outset it is also likely to have a low arrangement fee, or possibly no arrangement fee at all.

Expensive – Standard variable rates are usually substantially higher than the best mortgage deals.

Variable rates – Your lender can change the SVR at any time which can result in your monthly repayments rising.

What are the options when my mortgage defaults to SVR?
When your mortgage defaults to your lender’s standard variable rate you have a number of choices.

For many people it makes sense to remortgage onto a new deal. This is likely to be cheaper than your lender’s SVR so will bring your monthly repayments down. You can use our comparison tables to shop around for the best mortgage deal.

However, for some people remortgaging may not be an option. If you have a high loan to value (LTV) mortgage and house prices have dropped, you may find yourself in negative equity. This is where the amount you have borrowed on your mortgage exceeds the value of your home. It is very difficult to remortgage in this scenario as you would need a lender prepared to lend you more than the value of your home.

Equally, in recent years people with small deposits have struggled to remortgage when lenders pulled their 90% LTV mortgages.

You could also encounter problems if you have a poor credit rating or your income has dropped since you took out your current home loan, or you are now beyond the upper age limit for a standard mortgage. If the latter is the case you could consider moving onto a retirement interest-only mortgage.

If you are worried you won’t be able to remortgage there are a number of things you can do. You should also consider speaking to a mortgage broker, such as ourselves, who may be able to find a solution for you.

If you’ve completed a mortgage with Response before we will contact you before you default onto the SVR.

When a SVR might be the best option
For some borrowers it may make sense to stay on a SVR. If you want to move house or repay your mortgage, for example, you can do so without facing early repayment penalties.

Similarly, if you have nearly finished repaying your mortgage, fees may mean it’s not cost-effective to switch to a cheaper rate. The equity in your property could even be so high that you may struggle to get a remortgage deal.

If you aren’t sure what to do, Response can help to work out the most cost-effective option for you.