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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?

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The standard variable rate is normally the rate the mortgage lender charges to people who are not on a specific deal (though some lenders have more than one such rate depending on when exactly the loan is taken out). The rate is not explicitly tied to any particular government rate.

Most mortgages in the UK are sold with an introductory deal at a rate lower than the lender's standard variable rate. This deal may be a fixed rate or it may be a deal that tracks the Bank of England base rate. When the deal ends, if the customer doesn't do anything the mortgage will move onto the lender's standard variable rate.

Savvy borrowers with a good credit record, a good affordability position and large balances outstanding re-finance at this point onto another deal, but inattentive borrowers often neglect to do-so and borrowers whose financial lives have taken a turn for the worse may find it difficult to do so. Many people also ended up stuck on the standard variable rate as a result of changes to mortgage rules following the 2008 financial crisis.

  • From what you say I understand that this is a penalty rate, similar to overdraft, except that it applies when you cannot renegotiate a new contract, because you are in hospital for e.g. During the course of a mortgage contract you have to renegotiate several times. So there is some likelihood you will be hit by such a penalty rate. – Penny Fox Feb 11 at 8:36
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    @PennyFox: sometimes, your lender will contact you before the SVR kicks in, and offer to move you onto a different rate. In any case, moving to a different mortgage with the same lender may be a simpler process than moving to a different lender. – Steve Melnikoff Feb 11 at 10:23
  • @Peter Green I would like to mark your answer as the correct one. But Stackoverflow has messed something up so it is not possible. This question is not stored as my own question but as the question of another Penny Fox unfortunately. – Penny Fox Feb 12 at 9:37
  • @PennyFox - Flag your question for attention by a moderator and say you'd like the account merged into your main account. – AndyT Feb 12 at 15:03
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There is no published formula for the Standard variable Rate. Each bank decides for itself what their rate will be, based on any criteria they like.

In practice, it will be as high as the bank thinks they can get away with. Too low and they make less profit. Too high and even the more lazy customers will go elsewhere. Nobody with any sense chooses an SVR mortgage. As Peter Green says, it's the default rate that a customer goes on to when a special rate expires.

This wasn't always the case. In the past, the SVR was a viable alternative to a fixed rate mortgage. Sometimes it would be cheaper than the best fixed rate available, sometimes more expensive. The SVR reflected what interest rates were at the time, while fixed rates reflected what the lender thought they would be over the next few years.

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