With interest rates at an all-time low many are finding that staying on their lender’s standard variable rate is by no means as expensive as it once was. But could you be missing out on better deals if you don’t switch your mortgage?
Once upon a time sticking with your mortgage lender’s standard variable rate (SVR) longer than you had to was something most of us would have tried to avoid at all costs.
However, times have changed; what was once considered an undesirable rate that you’d be foolish to stay with has, in some instances at least, almost become a ‘discounted’ rate in itself, thanks to the massive reductions we've seen in the Bank of England base rate.
What is an SVR?
The SVR represents the lender’s standard rate, which your mortgage will usually revert to automatically after any initial discounted or fixed rate period ends.
As such, in times past it naturally followed that your default standard variable rate would be higher than the introductory rate you were previously enjoying. Therefore once you hit it you'd know it was be time to scout the market for something more competitive.
However, as any lender’s SVR is to some extent linked to the Bank of England base rate, many will have seen their lender's SVR slide to unprecedented lows – if perhaps not as far as the 0.5% of the base rate itself, still low enough to be extremely competitive in today’s marketplace.
In such a situation it’s easy to see why many are staying put on their SVR rather than contemplating the leap to a new deal. But is there any risk in staying on your SVR?
Why stay on your SVR?
The obvious reason is that mortgage SVRs have never been so low. You may have come to the end of a fixed or discounted rate and find that the rate your mortgage automatically defaults to – the SVR – is in fact quite competitive. It may be lower than the discounted deal you were previously on and even on par with the current batch of fixed rate deals on the market.
Even if you find a deal that gives you a lower rate than your current lender's SVR, it may actually work out cheaper in the short term at least to stay on your SVR rather than deal with the associated cost and hassle that switching will involve.
Why switch from your SVR?
The one big drawback that comes with staying on a standard variable rate is the keyword ‘variable’ – that means that the rate is changeable and can go up at any time at your lender’s discretion.
SVRs are usually linked to the Bank of England base rate (which is why they are so low at the moment), the Libor and a whole other subset of measures that fluctuate depending on market conditions. This puts you in a very vulnerable position as if the base rate, or any other measure used in your lender's calculations goes up anytime soon, it’s likely your SVR will too and this will mean that your mortgage payments will increase.
Naturally then your decision on whether to switch or stay will depend somewhat on how you think the base rate will perform over the coming year. While at the time of writing it’s at a steady 0.5% and has been since March 2009, it was less than 2 years ago (April 2008) that it stood tall at 5%.
Though a dramatic increase from 0.5% to 5% is improbable and we’re more likely to see a gradual incremental increase over the coming months and years, it’s still worth considering how you’d be able to afford your mortgage payment if your SVR saw a significant increase.
An important point to note is that rates will certainly rise again at some point – the only question is when. Some economists have predicted that the base rate will remain the same throughout 2010, only beginning to pick up its heels in 2011; while others see the base rate beginning to rise throughout the year. There’s no way of knowing for sure, but if you do stay on your SVR you’ll have to be prepared for possible rate increases.
What's the alternative?
To avoid the element of risk that comes with being on a variable rate, you might consider switching to a fixed rate deal. Switching to a fixed rate mortgage means that you’ll be able to take shelter from the shifts in the base rate and have a guarantee that your rate will stay the same for a set of period of time, whatever happens to the national interest rates.
Now may be a good time to lock into a fixed rate as there are many competitive deals on the market; while rates are low, it could be worth fixing your rate before they inevitably begin to increase again. Staying on your SVR may mean you run the risk that when you do want to switch, any fixed rates will have increased and no longer be competitive, leaving you high and dry.
If you switch to a fixed rate you’ll have the peace of mind that your repayments will be the same every month, allowing you to budget accordingly. However an SVR may be a cheaper option at the moment when rates are so low and switching away can incur a number of unwanted costs.
There are also a number of other options you can go for if either an SVR or a fixed deal isn’t for you. Mortgages that offer a capped rate (the rate won’t go higher than a set amount) or a tracker deal (your rate will fluctuate, but generally a couple of percent above or below the base rate or another measure chosen by your lender) may be worth considering if you aren’t keen on the changeability of an SVR but equally aren’t ready for the inflexibility of a fixed rate.
