Interest rate Effect on Mortgage Standard Variable Rates
A common question when people are looking at their mortgage commitment is what effect the bank of England’s interest rate has on mortgage standard variable rates. Unfortunately there is no definitive rule such as, “mortgage standard variable rates will always be 2% above the base interest rate”.
First of all, to clarify what a mortgage standard variable rate is. The standard variable rate is a rate that the lender will apply to all mortgage borrowings that are no longer subject to a pre-arranged mortgage deal, for example a fixed rate for 2 years or a tracker for 3 years.
When considering interest rates there are 2 important factor to consider; how much have the rates changed and when the rates change.
When will the SVR change if the Interest rate changes?
Each individual lender can ‘vary’ their standard variable rate at any time they choose. When interest rates have been dropped, say for example by 0.25% you may well be expecting the mortgage standard variable rate to drop 0.25% also. Unfortunately it is more realistic that there will be no change in the SVR at all, the lender will likely wait to see a further reduction before lowering their mortgage standard variable rate.
Conversely, if the bank of England raise the base interest rate, you are likely concerned the standard variable rate will rise. In the instance of a base rate rise, it is most likely the lender will raise their mortgage SVR; unlike a reduction the lender won’t wait for a further increase before raising their rates.
How much wil the SVR change?
Once again, this is up to the lenders discretion and unfortunately their discretion is likely out of kilter to yours! It is not uncommon for lenders to raise their mortgage standard variable rate by more than the bank of Englands raise, furthermore any reduction in the bank of England base rate will likely be watered down so for example if the BoE drop rates by 25 basis points (0.25%) for 2 months consecutively, your lender may only drop their standard variable rate by some 35 basis points (0.35%) leaving a 15 basis point gap which you are covering.