Standard variable mortgage

A standard variable mortgage is a lender’s basic interest rate, and there could be an advantage to using it, depending on circumstances.

• What is a standard variable mortgage?
• Is a standard variable cheaper than a fixed rate mortgage?
• Why is SVR so high?
• Is it better to get a fixed or variable mortgage? (include disadvantages and advantages of both)

What is a standard variable rate mortgage?

A standard variable mortgage is a provider's basic mortgage that is automatically applied if a borrower is not on an agreed deal. It is the fall-back mortgage for when another deal comes to an end and can be more expensive than fixed rates or trackers to encourage borrowers to tie their money up for a set period of time.

Unlike a tracker mortgage which follows the Bank of England's base rate, the interest rate of a standard variable mortgage is set and determined by the lender.

Interest rates on a standard variable loan can be volatile or unpredictable, as a mortgage provider can move the rate up and down, or freeze it any time they like. Unlike a tracker mortgage they do not have to follow a base rate, so even if the Bank of England decreases its base rate the standard variable rate does not have to follow. Likewise, they may freeze their SVR despite the base rate rising, in a bid to attract more customers.

Is a standard variable cheaper than a fixed rate mortgage?

A standard variable mortgage can be both cheaper and more expensive than a fixed mortgage, depending on market conditions. Fixed rates are set for an agreed period of time, usually two or five years, but also 10 and sometimes longer.

If a borrower took out a mortgage when interest rates were very high, but rates have since come down, they will be stuck paying more for their loan until their term comes to an end. 

It's therefore also the case that a fixed rate could have been secured before a big market shock which sent interest rates soaring, and in that scenario a fixed rate mortgage holder would be better off as they're protected from the volatility happening in the live markets.

Interest rates were exceptionally low in 2020 during the coronavirus pandemic, with the base rate hitting 0.1% in March that year and staying there for 21 months. Anyone who secured a fixed rate mortgage then will have been better off when the Bank of England's base rate began climbing in December 2021, and surging quickly past the 1% mark from June 2023. 

It's worth remembering the standard variable rate is set by the lender itself, so sometimes it may spare borrowers from an increase for a period to appear more attractive. However, it may find it more expensive to borrow money and feel the need to raise its SVR much more steeply to protect its bottom line.

Why is SVR so high?

The SVR is so high when the Bank of England's base rate rises or markets are feeling nervous and unsure about the future of the economy. The SVR typically, although not always, trails the Bank of England's base rate, and adds a bit on top to pay for its costs and make a profit. When the Bank of England raises its base rate, interest rates for mortgages generally follow. It's totally up to the lender to decide its SVR, so sometimes they hold back on raising it to be more competitive.

Mortgage lenders set their rates based on predictions for - and reactions to - the economy.

The mortgage provider is trying to predict the future of the economy years down the line when it sets its fixed rates, but it is also forecasting in the short term for its SVR.

If the UK is on the brink of a recession and there are fears of job losses or high inflation it could become more expensive to borrow money both for the mortgage provider and for its customers. In that case an SVR may rise in anticipation. It may also want to offset some costs while low fixed-rate deals are still active.

Is it better to get a fixed or variable mortgage?

Whether it's better to get a fixed or variable mortgage depends on market conditions and personal circumstances. If interest rates are high and it's looking like market conditions may improve soon, it could end up being more expensive in the long run to fix a mortgage at a rate that could be much higher than the base rate in six or 12 month's time. A variable mortgage could be cheaper, but then you may have to pay more in the short term until interest rates drop.

On the other hand, if inflation soars the Bank of England may decide to step in and increase interest rates to stop people spending (reducing demand and therefore prices), which would mean fixing at a lower rate now could protect you in the future.

The problem with each of these options is there is no crystal ball that will show exactly how the economy will react in the future - or if there's going to be another world-changing event such as a war or pandemic in the next few years.

Some people may not want to take the risk of an increase in interest rates. They may know they can afford what they are being quoted now but no more. In that case, it could be risky to take out a variable mortgage because if interest rates rise the borrower will struggle to meet the payments.

Fixed rate mortgage advantages

• You know your monthly outgoings and can plan ahead.
• Protected from rising interest rates.

Fixed rate mortgage disadvantages

• You could pay more than market rate if interest rates drop.
• Qualifying can be difficult when interest rates are high because mortgages are more unaffordable.
• Stuck paying a certain amount for a set amount of time.
• You may have to pay a penalty to end a fixed rate mortgage early.

Variable mortgage advantages

• When interest rates are low a variable mortgage rate is usually lower than a fixed rate which adds its own buffer in case interest rates increase during the term.
• Useful as a stop gap between fixed rate mortgages if you predict interest rates may drop soon.
• Often no early repayment penalty if you decide to switch to another deal.

Variable mortgage disadvantages

• Can be unpredictable, with payments changing whenever the lender decides to update its interest rates - often reacting to the Bank of England.
• Some lenders have a minimum interest they will always charge called a 'collar' so if interest rates drop to say, 0.1%, there could be a condition you will always pay a minimum of 1%.

What to do if you need a mortgage

In the current climate looking for a mortgage can be very stressful for you and your family.

Getting good advice from mortgage experts is important as they know the market, they know where the best rates are at any given moment, and they can match a package to your particular needs.

Complete the form to get quotes from an expert.