BORROWERS who lapse onto their mortgage lender’s standard variable rate (SVR) at the end of a fixed deal pay more than £2,500 a year, or £211 a month, in extra interest, according to online mortgage broker Trussle.
Customers are usually automatically transferred onto the SVR when their fixed deal expires, but the SVR is typically much higher than fixed rates, which can result in a payment shock. For example, Leeds Building Society’s SVR is 5.69 per cent, compared with its best two-year fix of 1.39%.
A borrower with a £150,000 mortgage who was transferred onto the SVR at the end of the fix would therefore pay £899 a month, up from £592 – a jump of £307 a month.
The difference between the average two-year fix and the average SVR is now at its highest level for 10 years, according to Moneyfacts, the financial data firm. In 2016, the average two-year fix was 2.44%.
The average SVR is now 4.85% and the gap of 2.41 percentage points is the biggest since March 2008.
Charlotte Nelson, finance expert at Moneyfacts, said: “The recent base-rate increase has seen the average SVR rise from 4.72% in August to 4.85% in September.
“Borrowers coming to the end of a two-year fix today will have the biggest incentive to switch for ten years.”
Just over half of lenders increased or have announced an increase in their SVR following the base rate hike from 0.5% to 0.75% in August. Most put up the rate by the full quarter point.
The typical SVR is now above 4%, but some lenders charge more than 5%. Clydesdale Bank, for example, charges 5.2%.
Ishaan Malhi, chief executive and founder of Trussle, said: “Across the UK there are two million borrowers currently on an SVR, who could collectively save £5 billion a year by switching.
“Homeowners are essentially being penalised for loyalty and collectively overpaying on interest by billions of pounds every year.”
Lenders are obliged to warn customers when they are nearing the end of a fixed or other deal, but Trussle would like more to be done.
Mr Malhi said: “We’re asking that a mandatory letter is sent from lenders to borrowers exactly three months before the end of the initial term, which must be accompanied by electric communication to ensure it’s not missed. It’s vital that homeowners know when the introductory period of their mortgage is coming to an end and are able to switch when it’s right for them.”
In the meantime, experts advise borrowers to be aware of when their mortgage deal will end and what other options are available to them.
David Hollingworth of brokerage L&C Mortgages said: “It pays to plan ahead so that you can switch to a better deal before your mortgage reverts to the SVR.
“It’s possible to secure a new rate three to six months ahead and it makes sense to start looking three or four months before the end of the current deal.”
Research from trade organisation UK Finance suggests that many people are seeking to do just that, with £8.7bn worth of mortgage debt being remortgaged across the UK in the month of July. That was 26.1 per cent higher than in the same month last year, with UK Finance suggesting the rise is likely down to borrowers seeking to lock-in a fixed rate ahead of further anticipated increases to the base rate this year.
Jackie Bennett, director of mortgages at UK Finance, said: “The residential remortgaging market saw its strongest July in over a decade, as homeowners pre-empted the latest Bank of England rate rise by locking into attractive fixed-rate deals.”
While they tend to more expensive than popular two-year fixes, mortgages with longer terms are also proving popular, with consumers seeking to hedge against the potential for economic volatility by securing five- or 10-year fixes.
Last month Moneyfacts said the number of 10-year fixed rate mortgage deals had increased by 35 compared to a year ago, with 139 such deals to choose from. The average rate on these products is falling too, with the typical 10-year mortgage charging a rate of 3.52% in July 2016 and 3.1% in August this year.
This week Halifax announced a new £1,000 cashback incentive on its mortgages, with five-year remortgage fix charging 2.49% and its 10-year product charging 2.69%.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules here