Should you ever stay on your lender’s SVR?
With the economy unpredictable and the Bank of England base rate at a 14-year high at 3.5%, it’s no wonder so many people feel unsure about whether to commit to a new mortgage deal at the time of writing (January 2023).
If you’re coming to the end of your current rate and aren’t sure whether to tie yourself into a new rate, you might even be considering simply letting your mortgage default to the lender’s standard variable rate (SVR). But should you ever stay on your SVR?
Let’s look at the pros and cons to help you decide if this is a viable option to consider…
How are standard variable rates set?
A lender’s SVR is not the same as its tracker mortgage rate. Whereas a tracker mortgage is tied to the Bank of England base rate, the SVR is set completely at the discretion of the lender. While in practice it often follows a similar path to the base rate, it could be increased at any time. This extra risk is one disadvantage of sticking with the SVR.
You’ll pay more every month
The biggest con with staying on your lender’s SVR is that it will cost you more. The SVR is where a lender makes their money – they tempt you in with a cheap initial deal and then bank on the inertia of people who let their mortgages slip into the higher SVR when it ends. Even if the SVR is only a percentage point higher than your previous rate, you’ll be paying back significantly more over the term of the loan.
Should you stay on your lender’s SVR if you think rates are going to go down?
If you suspect that interest rates might be going to come down in the near future you may be reluctant to commit to a fixed rate deal for fear of overpaying. In this scenario you might decide that staying on the lender’s SVR is a way to hedge your bets while you wait to see how the market changes.
While it’s true that flexibility is one of the key benefits of the SVR, this strategy doesn’t come without risks. If mortgage rates rise instead, you’ll be paying a lot more on a SVR than if you had fixed, and if they come down then it could well be that opting to tie yourself into a tracker deal could have got you the same benefits at a lower cost.
If you’re thinking about staying on your SVR because you’re not sure whether or not to commit yourself, then it might be a good idea to take some financial advice to make sure you’re not losing out.
You could pay off your mortgage sooner
There is one important scenario where staying on a lender’s SVR could be a sensible option, and that’s when you know you want to pay off your mortgage early. This could be because you’re in the process of selling your home or because you’re expecting an inheritance, a bonus, or have a high income and plan to make large overpayments every year, over the typical amount allowed in a fixed rate or tracker mortgage.
In this scenario you benefit from a SVR mortgage having no early repayment charges attached. You’re typically not tied into a fixed term, and can make overpayments or pay your mortgage off in full at any time without being penalised financially.
An additional benefit of an SVR is that they tend to have low or zero set up fees. However, many mortgages have arrangement fee offers or let you absorb them into the cost of the loan, so this doesn’t tend to be a good reason on its own.
If you’re at all unsure about what to do as you approach the end of a fixed term, talk to a mortgage broker – they can give you a clear picture of your options and help you choose the best deal.