Variable Rate Mortgages – Setting The Standard

Understanding the Standard Variable Rate (SVR)

The Standard Variable Rate (SVR) is a key mortgage term that you should be familiar with. It represents the interest rate applied to the total amount borrowed and is typically expressed as a percentage. Unlike the Annual Percentage Rate (APR), which encompasses all costs associated with the loan—including interest, fees, and any compulsory insurances—the SVR specifically refers to the interest rate component.

Key Characteristics of SVR

• Variability: The SVR fluctuates based on economic conditions and lender policies. The primary factor influencing SVRs is the Base Rate set by the Bank of England. Historically, when the Base Rate is low, mortgage interest rates are generally more favorable. However, SVRs can rise if the Base Rate increases, so it's important to be aware of potential future changes.

• Comparative Tool: While SVRs vary widely among lenders, comparing them can provide insight into which lenders offer more competitive rates. It is essential to note that this comparison might not always reflect the full picture, as other factors can affect overall mortgage costs.

Special Introductory Rates and SVR

Many mortgages offer special introductory rates before reverting to the SVR. These introductory rates may include capped or collared mortgages. Additionally, there are fixed-rate and interest-only mortgages, which are detailed later in this guide. When evaluating mortgages with introductory rates, consider the SVR that will apply after the initial period. Be aware that mortgages often come with conditions requiring you to remain with the same lender for several years post-introductory period, and penalties may apply if you switch lenders during this tied period.

Interest Calculation Methods

It is important to understand the difference between interest calculation and interest charging:

• Daily Calculation: Some mortgages calculate interest on a daily basis. This method can be more advantageous for borrowers because your balance reduces each month, thereby decreasing the interest charged, even if the reduction is minimal.

• Monthly or Annual Calculation: Other mortgages may calculate interest monthly or annually. Annual calculations are less favorable, as you may end up paying interest on the full balance for an entire year, despite making repayments that reduce your balance.

• Charging in Arrears: Ensure that interest is charged in arrears rather than in advance. Charging in arrears means that interest is calculated based on the balance after repayments have been made, which is generally more favorable for borrowers.

Understanding these aspects of mortgage interest rates and calculations can help you make more informed decisions and potentially save on borrowing costs.