Apathetic Brits could save over £200 a month simply by switching their mortgage. Jane Baker explains how.
This article was originally sent to readers as a standalone email in our 'Good, Bad and the Ugly' series.
As our 'The Good, The Bad and The Ugly' series continues, today I'm going to look at a real baddie the standard variable rate (SVR) mortgage. I don't just have one specific SVR product in mind either. When I say SVRs are 'bad', I mean they're all bad no matter who the lender is!
So what is the SVR?
Put simply, it's the bog-standard rate charged to all borrowers who aren't on special-rate deals. The SVR generally moves up and down in line with the base rate.
When the base rate rises, borrowers will be forced to pay higher mortgage repayments. When the base rate is cut, repayments should be adjusted down accordingly. (Some sneaky banks, however, don't pass on the full interest rate cut or wait a few weeks before taking any action.)
Still, you might think since the base rate appears to be on a downward trend this year, SVRs might not be all that bad. But don't kid yourself. This is still one of the most expensive ways to repay your mortgage.
How bad are SVRs?
Pretty bad. I've taken a look at scores of SVR mortgage products which are available now and found ridiculously high interest rates are an alarmingly common feature, with many charging around 7.50%. Considering the base rate has now been trimmed back to 5.25%, if you stay on your lender's SVR you could be paying a premium of 2.25% without getting anything extra in return.
Does that sound like a good deal to you?
True, some products may be a little cheaper than that but in the context of the wider mortgage market, they're all pricey. So, it's a mystery to me why roughly one in five borrowers continues to throw away money needlessly by paying the SVR.
Well done if you're already a serial re-mortgager! Keeping your mortgage costs down by switching as each deal comes to an end is one of the most Foolish things you can do. But if you don't move on quickly, let's take a look at what you could be losing.
Let's assume you have a mortgage of 150,000 over 20 years:
Mortgage Product | Interest Rate | Monthly Repayments |
|---|---|---|
Cheapest 2 Year Fixed Rate * | 5.08% | £996.57 |
Cheapest Variable Rate | 5.59% | £1,039.47 |
Typical SVR | 7.50% | £1,208.39 |
Source: Moneyfacts. *- With no extended redemption penalty beyond the fixed rate period.
In this example, you'll be paying more than 211 extra each month if you stay with the SVR rather than re-mortgaging to the most competitive two year fixed rate mortgage. What's more, with the fixed rate product you'll have the peace of mind that comes with knowing exactly what your monthly outlay will be for the length of the deal. With an SVR just like any other variable rate mortgage - you're at the mercy of a changing base rate.
Fair enough, I know that many Fools won't be on an SVR, but can you be sure you've got the best mortgage deal for you? The re-mortgaging principle applies to all borrowers alike.
So if you want to remortgage, it's worth speaking to your existing lender first to see if you can re-negotiate your mortgage. That way, you may be able to move to something more competitive but you won't be stung with a costly arrangement fee.
Make a point of finding out what your lender is willing to offer you to keep your business. And that applies whether you're on the SVR or not. And if your current mortgage deal is coming to an end soon, my advice is to act now. I wouldn't want to pay even one month at the SVR.
There's a vast selection of mortgage products on offer so if you feel overwhelmed by the choice, get help from a whole of market, fee-free mortgage broker. What's more, brokers often have access to special deals you won't be able to find on your own.
You could try The Motley Fool Mortgage Service for starters.