Mortgage lenders start raising current mortgage interest rates

Standard variable rates (SVRs) have started going up. Don't wait until it's too late to switch. Find out what to do now.

Are you happily sitting on your lender's standard variable rate (SVR) and benefitting from low mortgage repayments? Isn't it great?

Not only did you forgo any expensive remortgage costs when your last deal came to an end, and the hassle of switching, but it's likely that your monthly repayments fell when you automatically reverted to your lender's SVR.

Indeed, in many cases your lender's default rate could be cheaper than the new deals on offer to you now, particularly if you are with one of the country's larger lenders, which in the main have kept their SVRs low. Lucky Cheltenham & Gloucester borrowers for example revert to an SVR of just 2.5% -- that's a modest £673 a month on a £150,000 repayment mortgage.

But not every lender has such a low SVR. Chesham Building Society borrowers pay a hefty 6.45%, which means monthly repayments of £1,008 on a £150,000 mortgage. Plus research from financial information provider Moneyfacts has shown that SVRs have been creeping up over the last 10 months, while the Bank of England Base Rate has remained steadfastly firm at its record low of 0.5%.

It says eight lenders have increased their SVR since Base Rate has been locked at 0.5%, and that the pace of increase has quickened in recent months with two lenders (Marsden BS and Mansfield BS) putting up their SVR in January alone.

Why are lenders increasing their SVRs?

One reason lenders are pushing up SVRs is to make more profit from borrowers. But I'm guessing you figured that out for yourself, right?

Secondly, some lenders say they need to up their SVR in order to offset the costs of increasing their savings rates. The fact that the average savings rate actually fell from 1.48% to a pathetic 0.8% over the course of 2009 doesn't seem to stop them using this excuse.

Thirdly, lenders want to encourage borrowers to remortgage, since a huge chunk of that business has dropped off a cliff. And, while there is little incentive for borrowers to bother moving now, increasing the SVR makes switching to a fixed or tracker deal look more worthwhile.

The case for staying put

In addition to those borrowers on a super-low 'revert to' rate of 2.5%, if you've paid off most of your mortgage, and only have a (relatively) small amount left, it may not be worth switching from the SVR.

This is the case even when the rates you'd switch to are much lower than the SVR. For example, let's say you had a £40,000 mortgage and were on a 5.99% SVR. If you switched to Mansfield Building Society's best buy two-year fixed rate at 3.59%,you'd end up paying just £4 a month less than you would if you stayed on the much higher rate of 5.99% SVR. This is because you would have to pay a fee of £999 to Mansfield BS when you switched.

So, if you have a small debt outstanding, it may not be worth your while to remortgage, due to the large fees involved. Use our remortgaging calculator to check what your situation would be.

Switch and save

However, if you still have a decent chunk of debt to pay off, switching could provide you with tangible savings, even if you only have a short time left on your mortgage.

For example, if you had a larger balance of £70,000, you'd save £960 by taking that Mansfield deal - despite the large fee involved.

As always it depends on your individual circumstances, but those with a significant mortgage debt remaining should look at the possibility of switching.

Ask yourself these two questions:

  1. Which is cheaper over a set period when I take into account total cost, including the monthly repayments, plus any fees and charges I will be liable for?
  2. Have I considered the impact of interest rate rises on a variable rate and could I afford a significant increase in monthly repayments?

This last question is extremely important since it is inevitable that interest rates will increase in the future. Of course, there is no knowing when such rises will occur and how quickly rates will rise, but it makes sense to be prepared for increased mortgage payments if you are on a variable deal.

The only way to guarantee this will not happen is to fix your mortgage rate, which may mean paying a premium now. In other words, the cheapest option may not be the best for you, and you may prefer to pay a bit more for the peace of mind a fixed rate affords you.

But which are the best deals? Below are five of my current favourites:

LENDER

TYPE OF DEAL

RATE

FEE

MAX LTV

Mansfield BS

2-year fix

3.59%

£999

75%

ING Direct

3-year fix

4.29%

£795

75%

Leeds BS

5-year fix

4.75%*

£999

75%

Newcastle BS

2-year fix

3.65%

£994

80%

Saffron BS

3-year fix

5.89%

£995

90%

*Note that this rate is only available if you take the lender's Homecover. If not the rate rises to 4.99%, still one of the best buys available.

*Research from Moneynet.co.uk

Use lovemoney.com's innovative new mortgage tool to find the best mortgage for you online

Get help from lovemoney.com

If you need help getting the best mortgage use our resources.

First, adopt this goal: Cut the cost of your mortgage and pay it off early

Next, watch this video: Getting through the mortgage maze

Then, why not have a wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them?

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

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