This is a comprehensive guide provided by our team of mortgage advisors in Lisburn. If you’re in the process of buying a home or considering a mortgage, understanding the concept of a Standard Variable Rate (SVR) is crucial.
In this guide, we will walk you through everything you need to know about SVRs, ensuring you have a clear understanding of how they work and their impact on your mortgage.
Our aim is to empower you with the knowledge necessary to make informed decisions regarding your mortgage and navigate the complexities of SVRs confidently.
So let’s dive in and explore the world of mortgage SVRs together!
What is a Standard Variable Rate?
The term “SVR” is a commonly encountered term in mortgage documentation, and it plays a crucial role in determining the overall cost of your mortgage throughout its duration.
Although financial jargon can be overwhelming when reviewing mortgage paperwork, it is essential for anyone entering into a mortgage agreement to grasp the concept of standard variable rates imposed by lenders.
This understanding is pivotal in making informed decisions about your mortgage and its associated costs.
The standard variable rate (SVR) refers to the interest rate charged by your lender once the initial discounted, fixed, or tracker rate expires.
How Does the Standard Variable Rate Impact Mortgage Costs?
When the standard variable rate (SVR) comes into effect after the initial fixed or tracker deal period, it’s crucial to comprehend how it affects mortgage expenses.
As the SVR is typically set at a higher rate than the introductory offers, mortgage payments generally increase. Referring to the previous example, it is evident that transitioning from the initial deal rate to the SVR would lead to a significant £270 monthly rise in mortgage payments.
Moreover, there is the added risk of the SVR potentially increasing further, which is a common practice among lenders (refer to ‘What causes a standard variable rate to change?’).
Although statements like ‘you can always remortgage when your initial deal ends’ may downplay this risk, it is important to recognise that a remortgage is not guaranteed.
Therefore, it is prudent to ensure that you can afford the monthly repayments in case you need to remain on the standard variable rate for an extended period. It may also be beneficial to evaluate the potential impact if the SVR were to reach historical high levels by running relevant calculations.
What Does It Mean to Be ‘Stuck’ on a Standard Variable Rate?
When borrowers find themselves ‘stuck‘ on a standard variable rate (SVR), it typically signifies an inability to switch to a more favourable fixed deal after the initial discounted or tracker rate period.
Although it is generally advisable to remortgage and move away from the SVR, there are exceptional circumstances where it may be wise to remain on it.
However, there is no guarantee that every borrower will be able to secure a new mortgage, leading to being ‘stuck’ on the SVR.
Our mortgage advisors in Lisburn have detailed factors that contribute to this situation below:
- Changes in Credit File: Mortgage eligibility is influenced by a borrower’s affordability and creditworthiness. If there have been significant changes to a credit file since the initial mortgage was obtained, such as defaults or serious credit issues, it can impact the ability to remortgage. While there are mortgage products available for borrowers with credit challenges, they often come with higher interest rates to mitigate the lender’s risk. Monitoring and maintaining a good credit score is highly recommended.
- Changes in Personal Circumstances: The initial mortgage deal is based on affordability, considering the borrower’s income and expenditure. If personal circumstances change during the initial mortgage period, such as a career change or job loss resulting in reduced income, it may pose difficulties in meeting affordability ratios for obtaining a new deal.
- Property Condition or Circumstances: Aside from property value, certain factors related to the property itself can influence a lender’s willingness to offer a remortgage product. Local circumstances, such as flooding in the area, or broader housing market issues like the cladding crisis in the UK following the Grenfell Tower tragedy in 2017, can affect a lender’s decision. Many borrowers who took out mortgages on flats and apartments affected by cladding issues are unable to remortgage, resulting in being stuck on the SVR until a resolution is found.
- Changes in Property Loan-to-Value Ratio: The initial mortgage deal is based on the lender’s comfort with the property valuation and the loan-to-value (LTV) ratio meeting their lending criteria. If property prices decline during the initial period, the LTV may exceed the lender’s minimum requirements, making it difficult to obtain a remortgage product.
Benefits of Being on a Standard Variable Rate
While it is generally advised to remortgage at the end of a fixed, discounted, or tracker deal to enjoy lower monthly mortgage payments, there are instances where remaining on a lender’s standard variable rate (SVR) can offer certain advantages and flexibility for borrowers.
Here are some scenarios where staying on the SVR may be a better option:
- Overpaying on your mortgage: During fixed term deals, there are often penalties for overpaying on your mortgage, although most lenders do allow a certain overpayment allowance before penalties apply. If your circumstances involve making significant overpayments (e.g., receiving an inheritance to pay down the mortgage), staying on the SVR without any penalties for overpayments may be a sensible choice.
- Planning to move home: While some lenders offer the option to port your mortgage when you move home, in most cases, moving involves paying off the existing mortgage and taking out a new deal. If you are still within a deal period on your current mortgage, early repayment charges come into play. By staying on the SVR temporarily and accepting higher monthly payments, you can avoid hefty penalties when using the proceeds from the sale to pay off the mortgage.
- Intending to pay off your mortgage: Similarly, if you have plans to clear your mortgage in the near future, remaining on the lender’s SVR can help you avoid the costs associated with exiting a fixed, discounted, or tracker deal prematurely. By paying the higher monthly costs of the SVR until the time comes to clear the loan, you can save significant amounts in early repayment charges.
- Market conditions: While predicting market movements is challenging, during periods of economic slowdown, lenders tend to be more cautious with the mortgage rates they offer. If your mortgage deal ends during such a period, an experienced broker might recommend waiting on the SVR until lenders introduce more attractive deals to the market. In certain cases, the SVR may even be more affordable than the available new deals, making it more sensible to stay on the SVR and enjoy the flexibility until better options become available.
As demonstrated, there are various situations where remaining on a lender’s standard variable rate can be a good choice, and the decision to remortgage is not always straightforward.
Your Guide to Confident Mortgage Decisions
We hope this comprehensive guide on mortgage SVRs has provided you with valuable insights and knowledge. If you have any further questions or would like personalised mortgage advice, we encourage you to get in touch with our dedicated team of mortgage advisors in Lisburn.
Our advisors are here to help you navigate the complexities of the mortgage landscape and provide tailored guidance based on your specific needs and circumstances. Whether you’re a first-time homebuyer, looking to remortgage, or exploring mortgage options as a pensioner, we have the expertise to assist you.
By reaching out to our friendly team, you can benefit from our in-depth understanding of mortgage products, including SVRs. We’ll take the time to listen to your goals and financial situation, allowing us to provide you with informed recommendations and help you make confident decisions.
To enquire about our Mortgages in Lisburn, please visit our website. We offer a convenient online form where you can submit your details and request a consultation.
Remember, your mortgage is a significant financial commitment, and having the right guidance can make a world of difference. Don’t hesitate to get in touch with us today to benefit from our expertise and embark on your mortgage journey with confidence. We look forward to assisting you every step of the way.
Managing Director – Independent Mortgage Broker and Insurance Advisor
Helmut started working in financial services in early 2012 and founded The Mortgage Clinic in Belfast in early 2015. He specialises in all types of mortgages from First Time Buyer, Co-ownership, Self Build, Home Movers, Remortgages, Debt consolidation, to Buy to Let.
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