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Shining a light on SVR and affordability

Find out how certain product features can affect mortgage affordability 10 October 2023 by Gemma Reed

Shining a light on the impact SVR has on affordability

When comparing mortgages, do you focus on the headline rate?

If you do, you’re not alone. But, by looking at the ‘teaser’ rate of a short-term fixed rate (typically between 2 and 5 years), you may be missing the bigger picture. Did you know that the amount you can borrow isn’t usually based on that headline rate? The rate that is actually important in working out how much you can borrow is usually the rate you are charged after the fixed rate period ends. This is known as the ‘reversion rate’. You’ll often see it referred to as ‘standard variable rate’ or SVR.

So, let’s talk more about that…

 

Standard Variable Rate (SVR)

Fixed rates are a popular mortgage choice. But, when you choose to fix your rate over a shorter-term, you should take note of what happens after the fixed rate ends. The product usually defaults to a higher rate. You may see this next rate referred to as:

  • Standard Variable Rate (SVR)
  • Follow on rate
  • Reversion rate
  • Lender’s standard rate

This rate can change at any time and is set by the lender.

The reason this rate is so important is because lenders are required to use it when working out how much customers can afford to borrow.

They use this rate to estimate how much your monthly payments would go up by and check that you can afford it. Additionally, in the UK, lenders must check if you can still afford the mortgage amount you have asked for by calculating your payments using a rate that is at least 1% higher than their current reversion rate. This is called stress testing. Sounds complicated? Don’t worry, let us simplify this for you.

 

A quick example of how this affects the amount you could borrow

  • The ’teaser’ rate on a 2-year fixed product is 5.50%
  • The SVR is 8.0%
  • The lender will assess whether you can afford monthly payments at a rate of 9.0%

So, in this example, you may be able to afford the monthly repayments at 5.50%. But, to ensure they’re lending responsibly, the lender checks your affordability at 9.0%. This could reduce the amount you can borrow.

Let’s help you to understand by using example numbers. We’ll look at a mortgage of £200,000 over 30 years:

 

Diagram showing how mortgage payments are stress tested

In this scenario, the monthly payment during the fixed rate would be £1,136. But, the lender would need to check that you can afford monthly payments of at least £1,609. That’s £473 more!

Please note, all figures used above are for illustrative purposes only. All information correct at time of publication.

 

Check how much you could borrow with Perenna

At Perenna, the rate is fixed for the whole term. It doesn’t change to a variable rate. This means we don’t need to stress test your payments. We know exactly what you’ll need to pay each month.

Why not use our calculator to find out how much you may be able to borrow? It’s completely confidential, does not affect your credit score and should only take a few minutes.

 

 

You could lose your home if you don’t keep up your mortgage repayments.