Mortgage lenders' default rates are currently low, but they have massive potential to rise - and quickly. Should you switch your current mortgage interest rate if you're on the SVR?
The number of borrowers remortgaging has dropped hugely in the last year. According to the Council of Mortgage Lenders there were 33,000 remortgage loans in September, around half the number a year earlier.
At the same time mortgage lending overall is on the up, spurred by strong purchase business. In other words people are buying houses, but they are not switching their mortgage deal like they used to.
And there is one very good reason why.
Lenders' standard variable rates (SVRs), which many borrowers revert to at the end of a fixed or discounted rate mortgage, are really low -- in many cases lower than the alternative options.
In the past when a borrower came to the end of a fixed rate they would look for another cheap deal to switch to -- anything to avoid reverting to the 'expensive' SVR.
Now the tables have turned. It is very often cheaper to do nothing and move onto SVR than to change your mortgage. And a lot less hassle.
Cheap and cheerful
The average SVR according to financial information provider Moneyfacts is 4.71% (1/12/09), so it is little wonder many borrowers are tempted to stay on it.
And even better, if you looked solely at the SVRs from the country's largest lenders, it would be significantly lower. Lloyds TSB's (and sister lender C&G's) is 2.5%, as is Nationwide's Base Mortgage Rate. Halifax's SVR is 3.5%, Santander's (Abbey) is 4.24% and Woolwich's is just 1.99%. These lenders account for a great swathe of UK lending, so most borrowers will revert to a relatively cheap default rate when their existing deal ends.
See below for the top lenders' SVRs:
|
LENDER |
SVR |
|
Lloyds TSB/C&G |
2.50% |
|
Halifax |
3.50% |
|
Santander (Abbey) |
4.24% |
|
Santander (Alliance & Leicester*) |
4.99% |
|
Nationwide BS |
3.99% (Standard Mortgage Rate) 2.50% (Base Mortgage Rate**) |
|
Barclays (Woolwich) |
1.99%*** |
|
RBS/NatWest |
4.00% |
|
HSBC |
3.94% |
|
The Post Office (provided by Bristol & West) |
2.49% |
|
Bradford & Bingley |
4.59% |
|
Clydesdale & Yorkshire Banks |
4.59% |
|
Coventry BS |
4.74% |
|
Northern Rock |
4.79% |
|
Yorkshire BS |
4.99% |
|
Britannia BS and Co-operative Bank |
4.24% |
|
Chelsea BS |
5.79% |
|
Skipton BS |
4.50% |
|
Principality BS |
4.99% |
*intermediary-only products
**Nationwide customers with deals reserved on or before 29 April 2009 will revert to the variable Base Mortgage Rate (BMR) which is currently 2.5%
***This is not technically an SVR but a tracker pegged to the Barclays Bank Base Rate, but it is the lender's 'revert to' rate
When you compare these rates to those that borrowers could access elsewhere the SVR's look very competitive. But it's actually the amount of equity you have in your home that could determine whether or not it could be worth switching.
Why does your equity matter?
Deals for those who want to remortgage are priced (among other things) depending on how much equity you have in your home. If you have a lot, say 30% or 40%, the deals are competitive. Indeed, you can take your pick of sub-3% tracker rates and you could even go for a fixed rate from as low as 3.69% (from Abbey, First Direct and Hanley Economic BS). If you have 25% equity there is still a good choice available and rates are relatively keen. So it might be worth investigating the total cost of remortgaging vs. your lender's SVR.
However, if you have little equity in your home, such as 10%, you will find an extremely limited range of deals and prices that are much higher. It could still be worth switching though if your lender has a particularly high standard variable rate -- Chelsea Building Society's is 5.79% for example.
However, there is another financial benefit to staying put, even if your lender's SVR isn't that competitive...
No switching fees
Another massive advantage of going onto your lender's SVR is the fact that it happens automatically and you do not have to pay any fees. This can easily save you £1,000 or more.
If you switch your deal you have to pay an exit fee to your existing lender, typically around £250, an arrangement fee to your new lender which could be anything up to £2,500, but usually around £1,000. You may also be liable to pay valuation and legal fees, although many lenders waive these costs for remortgagors. Either way the total expense of switching can be significant -- staying put could be the cheapest option even if the rate isn't lower.
But is it the safest?
There is an obvious flaw with staying on your lender's SVR and that is the potential for that rate to rise, and therefore for your monthly repayments to increase.
Despite SVRs being historically low the margin between the Bank of England Base Rate and the average SVR is wide -- 4.21% in fact. SVRs rise and fall broadly in line with Base Rate, though at your lender's discretion, and therefore when interest rates go up, SVRs will usually follow them.
And because the margin is already far wider than its historical level, there is scope for lenders' SVRs to go really high.
If you have a £150,000 mortgage and are currently paying the average SVR of 4.71% your monthly repayments will be £852.
If Base Rate goes up to 2% and your lender passes on each rise your SVR would be 6.21% and your monthly repayments would shoot to £986. Could you afford that?
What if Base Rate goes back up to 5%, where it was for most of 2008? If your lender passed on the increases your SVR would rise to 9.21% and your monthly repayments to a whopping £1,280.
It is clear there is the potential for enormous increases in SVRs, maybe not this year, maybe not for the first half of 2010, but at some point rates WILL rise and many borrowers will be exposed.
Lock in
The alternative is to lock into a fixed rate mortgage now to protect yourself from these increases for a set period. Yes, they are currently priced at a premium compared to other deals and there's a good reason for that -- it's because of the likelihood of rising rates!
You could argue that it makes sense to sit on your lender's SVR for the time being, and then switch to a fix when the time is right. After all the bonus of an SVR is that you don't have to pay Early Repayment Charges to remortgage away from it. And this is a really good option for some people.
But remember, once rates do begin to rise, you can be assured that so will fixed rates. Those currently available could be the best about for some time.
Of course, there is never any way of knowing what will happen to variable or fixed rates in the future, or indeed to Base Rate. But what you know for sure with a fix is exactly what your repayments will be, no matter what happens.
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.