Could this trick save you thousands on your mortgage?
BY Harvey Jones
1st Jan 2015 Property
Millions of homeowners are potentially throwing away thousands of pounds a year by sitting idly on their lender's standard variable rate (SVR) mortgage. An estimated three million of the 11.1 million UK homeowners are currently on their lender's SVR but with a little effort, many could save an awful lot of money…
Wrong rate
The SVR (standard variable rate) is the rate you automatically revert to after your initial discounted or fixed-rate mortgage deal expires. This rate will typically be a lot more than you were paying before.
The UK’s six biggest mortgage lenders hit customers who slip onto their SVR with an average £3,242 hike in annual interest repayments, more than a month’s income for the average household, according to figures from online mortgage broker Trussle. Worse, you will languish on that rate unless you take steps to move on, which is ideally the moment your initial deal ends.
Lenders will do little to encourage you to switch: they enjoy fat margins on SVRs and use these to fund loss-leading rates to attract new customers in a competitive market.
Get in a fix
At time of writing, the average SVR stood at 4.69 per cent, according to figures from Moneyfacts.co.uk.
Yet best buy two-year fixed rates start can charge less than 1.50 per cent, especially for borrowers needing a low loan-to-value mortgage.
The savings you can make by switching should not be underestimated. Say you have a £150,000 mortgage over a 25-year term on the average SVR. Your monthly capital and interest repayment would total £850.
If you switched to a two-year fixed rate charging 1.50 per cent your monthly payment would drop to £600, saving you £250 a month. That works out as a saving of £3,000 a year—or £6,000 over the two-year term of your new deal.
Count the cost
However, you also have to factor in the costs of switching such as arrangement fees on your new mortgage, which typically range from zero to £1,000 upfront. Deals with lower interest rates typically have higher arrangement fees, so work out which option suits you best.
You might also face legal and valuation fees, which can add another £600 or so, although many lenders waive these on remortgages. It's worth shopping around or getting a quote from a mortgage broker before committing yourself.
Moving on
With mortgage rates at all-time lows, now is a particularly good time to search the market for a new rate. Interest rates have to rise at some point but any increases should only happen only gradually.
There is always a price to pay for apathy. When it comes to your mortgage, the price may be higher than you think.
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