Things are changing in the mortgage market. The much maligned Standard Variable Rate is making a comeback.
As recently as last year received wisdom said that only a fool would languish on their mortgage lender's standard variable rate (SVR). They were the borrowers the mortgage companies loved -- low risk, loyal, and paying through the nose out of apathy or ignorance.
The clever money was with those real Fools who remortgaged regularly -- rate tarts who happily nabbed the best deals. But times have changed and SVRs are making a comeback.
Fees Creep Up
A couple of years ago remortgage fees started to creep up and have more than doubled on an average mortgage since 2006.
Fee-free deals have all but disappeared as lenders aim for borrowers who are likely to stay -- not `park' until a better deal comes along or rates drop. The constant churn they had introduced by applying double standards to existing and new borrowers was expensive to maintain. Lenders eventually cottoned on to the fact that it's far cheaper to retain existing customers rather than acquire new ones.
These higher fees mean that if you are switching deal regularly -- every two years -- you really need to be moving to a significantly lower rate to offset the cost of moving your mortgage.
In the past five years this has always been a given because SVRs were so much more expensive than fixed or discounted rates. Say for example you took out a two-year fixed rate paying 5%. At the end of two years you would revert to the lender's SVR which might typically be 6.5% -- in other words there would be a significant gap between the fixed rates on the market and the pricey SVR.
But the differential between SVRs and fixed rates has now narrowed (as fixed rates have increased in price), reducing the benefit of switching. Competitive fixed rates hover between 5.75 and 6%, but many SVRs start at 6.4%. In other words - a fixed rate is still cheaper than staying on the SVR, but the two are now closer in price.
On a £100,000 mortgage, a 5.75% fixed rate would cost you £629 a month (based on a repayment mortgage over 25 years) and an SVR of 6.4% would be £668, costing you about an extra £40 a month. Not to be sniffed at, and over a two-year deal staying on your lender's SVR would cost you £950 more than moving to the fix.
But hang on a minute -- the average mortgage arrangement fee is currently £950 -- so there's your saving completely and utterly wiped out.
Small mortgage
If your mortgage is particularly large, the savings you can make by moving to a cheaper rate will be greater and you can therefore swallow the high fee and still make an overall saving. But if your mortgage is especially small, the size of the fee becomes very important indeed.
This affects not only those people who originally borrowed a small amount but also those who are nearing the end of their mortgage term and so have a relatively small debt left to pay.
On a £50,000 mortgage debt, the saving between the two deals mentioned above falls to £20 a month -- less than £500 over a two-year fixed rate period. Again, an arrangement fee will wipe this out or even cost you more.
And remember, it is not just the arrangement fee you will have to pay if switching -- you'll also have to fork out an exit fee to your existing lender, setting you back another few hundred pounds.
So how do you work out if you are better off staying put on your higher SVR?
Quite simply, do the maths. If you want to move to a new deal (such as a fixed or discounted rate), work out how much you would pay in total over the time period you want the deal to run for -- for example, two years. Then add on the remortgage costs including arrangement fees and your exit fee on your current deal. That's the total cost of moving.
Now work out the total cost of staying on SVR over the same time period and make your choice. Or ask your existing lender and your potential new lender to do the sums for you.
SVRs are becoming products in their own rights again after years of being considered the default option for those who don't know any better. The fact that some lenders -- including Halifax, the country's largest lender -- have pulled their SVR mortgages for new customers show that demand is strong for a low-fee product that doesn't impose such a premium on rate any more -- or lock you in.
So remember -- it's not all about the rate any more. The smart cookies look at total cost and will happily sacrifice a little on rate to save on fees and have the freedom to move.
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