17th April 2019
When you first take out a mortgage, it’s likely that you were placed on a ‘fixed’ or ‘tracker’ rate. A fixed rate mortgage is where, for the duration of the mortgage deal, the interest rate stays the same – meaning that your monthly mortgage repayment will also be the same. If you were placed on a tracker rate mortgage, the interest you pay reflects on the Bank of England, so if it the Bank of England’s base rate goes up, your interest rate and monthly repayments will go up too. Of course, this can work in your favour if the interest rate goes down.
Regardless of whether you’re on a fixed or tracker mortgage, once your deal comes to an end you will automatically be placed on your lender’s Standard Variable Rate (SVR).
The SVR is set by your mortgage lender and is different for every lender. Your lender can raise and lower the SVR at any time but they tend to be influenced by the changes of the Bank of England base rate. If the Bank of England base rate goes up so will most lenders SVR. In August 2018, the Bank of England base rate increased to 0.75% and, consequently, 43 out of 87 mortgage lenders increased their SVR by 0.25%.
When you’re placed on the SVR you are at risk of paying more each month for your mortgage. This is because the SVR is not the most competitive mortgage rate on the market and, as a ‘variable’ rate, it isn’t set in stone how much you could be paying each month. If your lender decided to raise the SVR, the extra you pay each month will go towards the higher interest rate rather than repaying the actual loan, so you won’t be paying off your mortgage any faster.
No early repayment charge
By remaining on the SVR you have more flexibility. SVR mortgages do not have an early repayment charge, unlike with a fixed rate mortgage – allowing you to switch to a new mortgage without a penalty if you find a better deal.
Repayment can decrease
Unlike fixed rate mortgages, if the Bank of England base rate decreases, the SVR with your lender will likely decrease as well.
As mentioned, SVR is not the most competitive rate on the mortgage and you’re likely to get a better rate by remortgaging.
Lack of security
Your lender can change the SVR at any time, which means that you can’t be confident of the cost of your monthly repayments. This can be a challenge if the SVR increases and your monthly budget is compromised or exceeded.
As of January 2019, the average SVR across multiple lenders is 4.9%, while the average 2 year fixed rate is 2.52%. To contextualise this, if you currently have a £120,000 mortgage with 25 years left on the term, on the SVR your monthly repayments will be £695. On a 2 year fixed deal with the above interest rate, your monthly repayment will be £540. That’s a saving of £155 a month, or £3720 over the 2 year fixed rate period. Quite a considerable difference!
If you’re currently on your lender’s SVR and are looking to remortgage, our advisers can help you find the right deal for you – no matter what your circumstances. We understand it can be challenging to secure a mortgage as a Contractor, so get in touch today and see how we can help.
All content is accurate at the time of publication
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