Here is my understanding of rates in general:
- Bank Rate: The interest rate at which banks borrow from the central bank. This rate can be changed any time by the central bank.
- Variable Mortgage Rate: This is called Tracking Mortgage Rate in the UK. It is the equivalent of the Bank Rate + a premium depending on the borrowers defaulting risk (usually around 2%)
- Fixed Mortgage Rate: This is broadly speaking the Bank Rate when signing the mortgage contract + a premium for the lending bank to hedge against the risk of increasing rates (depends very much on the yield curve until maturity of the mortgage) + a risk premium to hedge against lenders defaulting (as with the variable mortgage rate)
- Standard Variable Rate: This is what people in the UK seem to mean when they say variable rate. They do not mean tracking rate. So what is this?
I do not understand how the Standard Variable Rate is calculated by the uk banks or what it's purpose is. Answers elsewhere seem to agree that (a) it is up to the banks themselves to set this rate and (b) they set it higher than the fixed rates even if the rates are expected to rise. (c) Often they are significantly higher than both, fixed rate and tracking rate. a,b and c would be surprising to me even if they would stand each by themselves.
Hence my question is: What is the SVR exactly? how is it calculated? why would any one choose a standard variable rate mortage? Has the SVR mortgage ever been below the tracking and fixed rate mortage at the same time? Does this kind of rate exist anywhere outside the UK?