Standard Variable Rate Mortgage

The scourge of mortgage borrowers, and the saviour of mortgage lenders - the Standard Variable Rate (SVR) Mortgage refers to the rate that applies, in the abscence of any preferential rate for the borrower.

The Standard Variable Rate usually applies at the end of any discounted, fixed, capped, or tracker rate, and if accepted by the borrower by default, will mean an increase in mortgage payments.

This increase is often significant

For example, the interest payment on a £100,000 mortgage at a discounted or fixed rate of 4.5% would be £375 per month.

Coming off one of these deals, onto a current, common, SVR of 6.74% the monthly payment would be £561.67.

This staggering difference of £186.67 per month, could be used to pay off the mortgage many years early, fund a small pension, assist with Higher Education fees, or pay for a good annual holiday.

The Solution

There are two solutions to this problem:

1. Remortgage to another lenders fixed, discount, capped, or tracker rate. Provideded that the cost of remortgaging, makes the transcation financially viable, this is the usual option. Borrowers often take the opportunity to consolidate debts at the same time.
2. Ask your existing Lender to offer you a prefferential rate - Lenders vary in their attitude to theirs borrowers whose deal has ended. A few will allow the same deals as they offer to new borrowers, albeit for the same fees. Most will offer an intermediate rate, somewhere in between their best rates and SVR. A few make no offer. The point is that you usually have to ask. If the lender switched all borrowers off SVR and onto a better rate, it would cost the lender money. This would possibly have the effect of making their new deals uncompetitive, as they would have to make up for the loss, either via higher mortgage rates, or higher fees.

Why then, are an estimated 1/3 of mortgage borrowers, voluntarily paying the Mortgage Lenders SVR?

1. Resistance to change. Some people are just so adverse to change that they would rather pay more for their mortgage than do something about it. The only thing that will change their minds is discomfort in meeting their mortgage payments or other financial obligations.
2. Small mortgages - typically under £25,000, where the fees for remortgaging may eat up, much of the benefit of a lower rate.
3. The borrower is trapped in an extended redemption penalty period. Some borrowers are seduced at the outset, by a very low initial rate or a large cashback mortgage. They pay for this later, by being trapped on the SVR after the special rate ends, typically for 2-3 years. For a cashback mortgage, the rate will usually be SVR immediately, and often for the first 5 years of the loan.

 Unsurprisingly then, basic advice is to avoid paying your mortgage lenders Standard Variable Rate (SVR) if at all possible.