Question about interest rates / Standard Variable Rate

[Mandy21]

Sorry, perhaps I should have posted this on one of the money forums, but wondered if you "property" people could help :-).

We're coming to the end of our current mortgage deal and the standard variable rate (which we'll revert to) is currently 3.99%. This saves us about £200 per month from what we're currently paying (4.93%) but obviously need to anticipate what might happen in the future to determine whether interest rates will go up.

I know the general consensus that a rise is not likely for at least a year, but I'm presuming this means to the Bank of England rate. This might be a very stupid question, but do banks only change their SVR when the Bank of England changes their rate? Is the bank likely to increase their SVR independently of anything the Bank of England does?

I've been watching mortgage deals since just before Christmas since we were allowed to "reserve" another product if our current deal was finishing in the next 3 months. When I first started looking, my current lender was offering a 2 yr fixed deal at 3.79%. Over the past month, thats gone up to 3.89, then 3.99 and when I've looked this morning, its up to 4.19%. Am quite surprised that everyone is saying "rates won't increase" but this is obviously an indication of rates going up.

So, can anyone tell me (and I know everything is uncertain) whether banks are likely to increase their SVRs over the next 2 years even if the Bank of England keeps the base rate at 0.5%.

Thanks

We have just taken out a new mortgage and fixed it for 5 years. After discussion with my dad (who follows the markets etc) we thought it was the best thing to do, as he is also convinced the rates will increase over the next couple of years. Therefore a 5 year fix was the best option for us.

It depends on whether you can afford to take the chance if the rates go up.

Personally I like knowing what I am paying each month, so would rather do fixed rate then take the risk at the moment.

We got a 10 year fixed a few years ago so while it is costing us more than it could now we have the security of knowing exactly how much we will be paying out long term which is important when other things are not so secure.

Nobody knows the future, but I would say if you can get a 10 year fixed, that is fine. But otherwise you are much better off with a variable mortgage based on the BOE rate, not the bank's own borrowing rate.

I do not think interest rates will rise substantially over the next five years. They haven't in Japan, for a decade. And even if they do rise, it won't be more than a few percent points. The fixed rates for five years seem to be over 5%, in my mind that is silly money to pay when you can get a 2.8% variable one. Even if rates rose by 2%, I think in many cases you would still be better off with a variable rate.

Yes, SVR can change even if the base rate remains constant.
The only exception would be if the reversion rate is tied to the Bank of England base rate, rather than the SVR of the lender.
Whether they would or not is a different question. IM(inexperienced)O, it isn't common, as it gets a load of bad publicity, and most have already put up the SVR due to the low base rate.

Oh, and consider, if interest rates rise in a years time, you might be looking to re-mortgage off the fixed at the peak of the market - I'd consider variable, or a longer term fix.

We're not looking to get into a long term fix as we are potentially having an extension in the next 2 years and will need to re-mortgage. I know there are some deals with a long term fix where you can apply for additional borrowing, but those seem to be few and far between.

Thanks for all the comments so far, very useful.

Historically, sticking to an SVR deal has been cheapest over the lifetime of a mortgage. But you have to save like mad in the good years, and endure an awful lot of sleepless nights in the bad ones. My parents are doctors with the kind of job security I can only dream of, but I distinctly remember my mother overwhelmed and weepy in the mid-80s over the mortgage payments at 17% which she had on both the house and her surgery.

If you don't want that kind of stress and don't have the discipline to save hard for rainy days, you'll be better off - psychologically if not financially - with a fixed rate.

Unfortunately, you'll never out-smart the bank by taking out a fixed rate. The rate is high because they have priced-in the worst case scenario...you're effectively paying their insurance.

It is true that lots of people are on trackers with banks that didn't anticipate the 0.5% base rate. It's never happened before, and it's such financial lunacy that you can imagine why the bankers and actuaries never thought such a possibility would arise.

I took out a 10 year fix in 2008 at 4%, and I've been sick as a pig over the last couple of years, as you can imagine.

However, my friends' frankly amazing 2006 BR+0.5% tracker 5 year deal recently ran out. They thought, "No worries, the base rate is only 0.5%, we'll be okay on an SVR."

They've been horrified to discover their bank's SVR is actually 4.25%, so their mortgage has almost quadrupled. Can't they just remortgage with another bank? No - most lending requirements are now 3.75% joint salary, not 4X joint which it was when the bought. And since my friends bought, they've had twins, and the wife has had to give up work because her salary wouldn't cover the cost of childcare.

So yes, you could outsmart the bank in a black swan once in a blue moon way, but the buggers will still catch you out in the end.

I think interest rates will rise next year but I don't think it will be by much. The best thing to do is to find a local IFA who can advise you and set up a new mortgage for you.

You might find this recent article interesting.

Bear in mind that fixed rate mortgages are not necessarily based on the Bank of England interest rate, but on the market's 'swap' rates which have been pushed up by the Eurozone crisis. It is also influenced by lenders trying to make more profit!

As others have said generally variable rates are less expensive in the long term than fixeds where you're paying a premium for certainty about your payments.

Mine is 6.1% but on a small mortgage & I wanted to know that the repayments were what I could afford. I'm rubbish at raffles & if I'd gone for the SVR, knowing my luck it would be 14% by now!! I think it's to do with you as a person -how much risk do you like? One thing's certain - the only way is up but the question is when?

Thank you for all your replies. As I said, we're going to have to re-mortgage in 2 yrs or so anyway so I'm not contemplating staying on the SVR for very long. I know the likelihood is that the Bank of England rate is going up, I just wanted to know about the connection between banks' SVRs and the BofE rate. Sounds like banks will be guided by the BofE rate, but effectively they're free to increase their SVRs whenever they want.

We have just remortgaged with first direct who are offering a capped tracker 2.88% at the moment. It will increase if the base rate goes up but only to a capped level just over 4%. We went for this so we get a low rate at the moment but if rates go up we have the security of knowing our maximum payment. This max is less than our previous fixed rate deal so works for us

We have been looking around for mortgages too. And have been puzzled -like you- at banks putting up their rates. From what I have gathered it seems to be linked to the crisis in Euro countries. It doesn't necessarily mean that the BofE rate will start rising, just that UK banks expect they will have tougher time lending to and from EU banks... Mind you, am not econo-wizz....
Just FYI, might want to check out moneysupermarket or the likes: re-mortgaging is always soooooo much cheaper than mortgaging.. There are some deals for 1.99+BofE as long as you are borrowing less than 60-70% of house value... plus some hefty fees, but that might be worth it if you do sums???

Bank SVR are based more on longer term rates than current BOE rates. Current gilt yields are 0.5% for up to 2 years and then increase to 3% for 20 yrs or more. As the banks fund the money they lend to you by borrowing longer term, they are having to pay c.3+%, therefore will charge you more. Long-term rates are where the market expects rates to go, so increasing SVR are also linked to expected increased rates.
Also banks know a lot of people are unable to change their mortgage at present, so are taking extra profit as people do not switch.