Mortgages: SVRs explained

Millions of mortgage borrowers are paying their lender’s standard variable rate (SVR), but Halifax’s decision to increase its SVR is a timely reminder that these mortgage rates aren’t directly linked to the Bank of England base rate. Clare Francis explains how they work and looks at the options for those currently on an SVR…

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The Bank of England base rate remained unchanged at 0.50% for three years, however as 850,000 Halifax mortgage customers are about to find out, that doesn’t mean your mortgage repayments won’t change.

From May 1 Halifax will increase its standard variable rate – often referred to as the SVR - from 3.50% to 3.99%, adding £16.50 a month to the average mortgage payment.

So why can a lender increase the SVR even when there’s been no change in base rate? And what does it mean for other borrowers?

Let’s take a look...

The SVR is a rate set by the lender. Therefore it is not directly linked to the Bank of England base rate.

The SVR is the rate of interest you usually pay once the fixed or introductory discount or tracker rate on your mortgage comes to an end.

Historically, most people tended to switch to another mortgage at this point because the SVR tended to be higher than the rates available on new mortgage deals.

However, over the last few years many SVRs have been lower than new mortgage rates. As a result an increasing number of people have opted to stick with the SVR rather than remortgage onto a new deal.

SVRs usually change following an increase or decrease in base rate but not always – it’s up to the mortgage provider. And even when base rate does change, the track record of lenders moving the SVR by the same amount isn’t great.

When base rate fell from 5% to 0.5% between October 2008 and March 2009, Lloyds TSB was the only one of the top 20 lenders to reduce its SVR by the full 4.5 points.

Anyone currently on their lender’s SVR should consider remortgaging now.

If you want to switch onto another variable rate deal go for a tracker rather than a discount. Trackers are directly linked to base rate so the rate you pay will mirror any base rate changes. Discounts on the other hand are linked the SVR.

If the prospect of higher mortgage payments worries you, a fixed rate will protect you from base rate increases for a set period of time.

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