Britain's Cheapest Mortgages

We've tracked down the lowest, highest and most popular standard mortgage rates. Just how competitive is your lender?

Cash purchases account for around a quarter (25%) of all housing transactions, but 75% of us are forced to buy our homes using a mortgage.

Alas, finding a home loan is far from easy, as there are over 8,500 different mortgages from which to choose. Even worse, there are various fees lurking in the small print, each poised to bump up the cost of financing your home. (Rather than explain all of the ins and outs of mortgages in this article, I'll direct you to our A-Z guide: Your Easy Guide To Mortgages and Your Easy Guide To Mortgages, Part 2.)

With such a huge range of mortgages, it's all but impossible for a layperson to find the ideal low-cost mortgage to suit his/her needs. That's why about two-thirds (67%) of all home loans are arranged by mortgage brokers, which do the number-crunching for their clients. (Indeed, we're rather proud of the Fool's award-winning, no-fee, whole-of-market mortgage service, which thousands of Fools have used to find better deals!)

So, without the aid of a fancy database, how can we weigh up the relative merits of this mountain of mortgages? The simple answer is that we can't, but what we can do is compare mortgage lenders using a benchmark known as the standard variable rate (SVR). The SVR is the bog-standard mortgage interest rate paid by all borrowers who aren't paying a special rate to their lender. Every mortgage lender has an SVR, so we can group and compare mortgage lenders based on their respective SVRs. Eureka!

Let's do this research, starting with the:

The Good: the ten lowest standard variable rates

Source: Moneyfacts

As you can see, ING Direct UK, a division of big Dutch bank ING, takes top honours with the only SVR under 6% a year. Given that the Bank of England's base rate is 5.75% a year, ING's rate is remarkably low. First Direct, part of global giant HSBC, just misses out on a medal in fourth place, with First Active and Tesco PF (both part of the Royal Bank of Scotland Group) coming fifth.

Online bank Egg takes eighth place, with the rest of the table dominated by six small building societies. These mutual societies are owned by and operated for the benefit of their members, so they have no shareholders. Hence, they provide a valuable service to local people by offering decent rates of interest on home loans. Who needs big banks?

Now let's take a look at the other end of the SVR spectrum:

The Bad: the ten highest standard variable rates

Of the top four places, three are taken by The Mortgage Business, Birmingham Midshires Solutions and UCB Home Loans. These lenders focus on lending to borrowers with less than perfect credit histories and workers with irregular incomes, which explains their high SVRs. Nevertheless, HBOS group is ripping off Scottish borrowers, as its Bank of Scotland arm has the highest high-street SVR of any mainstream mortgage lender. Perhaps it's time for greater Scottish independence?

The remaining places are taken up by the 'usual suspects': the big banks who squeeze their borrowers in order to maximise returns to their shareholders. Notable among these are RBS/NatWest, Barclays/Woolwich and Alliance & Leicester. Sadly, I'm disappointed to see a big building society in these ranks: Scarborough BS clearly has very different values to the six societies in our earlier Best Buy table!

For our final table, let's review the SVRs charged by the UK's ten biggest lenders. These are the giants of mortgage lending:

The Ugly: the standard variable rates charged by the UK's biggest lenders

Our survey shows that the SVRs charged by the UK's biggest lenders are nothing to write home about, ranging from 7% at HSBC to 8.19% at Birmingham Midshires. Frankly, if you're paying any of these lenders' SVRs and can switch deals without penalty, I'd demand a better rate or jump ship to another lender.

Another interesting observation is that depending on how you approach HBOS (the Goliath of UK mortgage lending, with a 21% market share), your SVR can vary considerably. At online arm Intelligent Finance, the SVR is 7.35%, but at Bank of Scotland it's 0.75% higher at 8.10%. Generally speaking, the bigger the lender, the higher its SVR, and this link has been strong throughout my twenty years in financial services.

Finally, if the Bank of England raises its base rate to 6% later this year, we'll see the standard variable rates of many major lenders exceed 8% for the first time since the Nineties. This means more bad news for borrowers paying the full whack. So give high SVRs the push by switching to a reduced-rate mortgage; if you can do so without penalties, of course!

> Read more about property: UK Housing Boom Leads The World.

Disclosure: Cliff owns shares in HBOS and has a beneficial interest in RBS.