A lender’s standard variable interest rate is typically set at about 2% above the Bank of England Base Rate (BOEBR), and tends to rise in fall as the BOEBR rises or falls. This means that the monthly amount you repay can go up or down depending on how your lender reacts to economic conditions, such as changes in the base rate.
For example, a Bank of England rate hike could prompt a similar rise from your lender. Conversely, a drop in the base rate could see you paying less each month for your mortgage.
The Credit Crunch and Mortgages: It used to be the case that a lender’s SVR would almost certainly be their most expensive mortgage, but the credit crunch changed the rules. For example, back in November 2007, the Bank of England Base Rate (BOEBR) was 5.75%, a whopping 5.25% higher than just two years later. As a lender’s SVR is typically around 2% above the BOEBR, a homeowner on a SVR mortgage would have paid 7.75% in interest. At the same time, you could have got a fixed-rate deal for around 5% interest or less, which would clearly have been a cheaper option. However, a fixed-rate deal at 5% interest in November 2009 didn’t look such a great deal when you considered a lender’s SVR of BOEBR plus 2% meant interest of only 2.5%. This is probably why fixed rate mortgages – which once accounted for the majority of new, pre credit crunch, mortgages – accounted for only a third of new mortgages in September 2009 (source: John Charcol).
In practice, however, it’s unlikely that you will sign up to an SVR mortgage. It is far more likely that a homeowner will sign up for one of the lender’s headline mortgage deals – usually an offer with a discount, tracker, capped or fixed deal period (typically lasting between one and five years). Once this special offer period has ended, that’s when a mortgage usually reverts to the lender’s SVR.
Next - Part 9: Fixed Rate Mortgages
