Standard Variable Rate Mortgages - Pros and Cons
Getting Mortgage Advice and Always Performing a Mortgage Comparison
Dec 11, 2008
Once an agreed fixed term ends, the lender switches the mortgage to a Standard Variable Rate (SVR). Standard Variable Rate mortgages are linked to the Bank of England base rate, but they're set 1-2% above this level.
Richard Morea, a broker at London & Country, said that "The profit margin being made through SVR and the retention rate is not as high as it used to be". With falling interest rates and high inter-bank borrowing costs (LIBOR), Standard Variable Rate isn't as lucrative to banks as it once was.
Nobody chooses a Standard Variable Rate mortgage, it is a default rate reverted to once an offer period expires. This is the most profitable mortgage to a lender which means that it is the most expensive rate for the borrower.
The Advantages of Standard Variable Rate Mortgages
- Flexibility. The borrower isn't tied in which means that no redemption penalty has to be paid to enter a new, low interest mortgage.
- Opportunity to repay some of the capital. Should some extra money become available, as a result of a bonus or inheritance, it is possible to pay off some of the mortgage without penalty.
- Other mortgages aren't always available. Richard Morea of London and Country stated that "Recent times have been miserable for people with 90 per cent LTV's. Put simply, they haven't had a choice of mortgages to go to." Banks don't currently want customers with high LTV's due to the risk of default and negative equity.
- The low interest cycle. Those on Standard Variable Rate can benefit more than those on fixed rates when interest rates are in a downward cycle.
The Disadvantages of Standard Variable Rate Mortgages
- Generally the most costly form of mortgage. Although less so in a climate of low interest rates, Standard Variable Rate tends to be the most costly form of mortgage borrowing because it isn't linked to a mortgage deal.
- Rates don't always fall in line with base rate cuts. Banks don't cut interest rates nearly as quickly as they raise them. It has taken political pressure to get them to react to recent rate cuts.
- Lack of stability. It can be very difficult for families to budget during periods where interest rates move erratically.
Conventional wisdom states that those who reach the end of a mortgage term should get a remortgage to come off Standard Variable Rate. However, a number of lenders will be reluctant to pass on lower, fixed rate mortgage deals to new borrowers in the current climate.
Those that found this article useful may also be interested in reading about Fixed Rate Mortgages - Pros and Cons and Mortgage Insurance - Useful Tips Before Buying.
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