Why you should ditch the SVR

Do you know how to get rock bottom mortgage rates? If not, you could be wasting an awful lot of money.

There are some really worrying statistics flying about right now which suggest UK mortgage borrowers aren’t as savvy as they need to be.

The Consumer Financial Education Body (recently set up by the industry watchdog, the FSA), revealed recently that one in seven (15%) borrowers don’t know what type of mortgage rate they’re paying, and are unaware of whether they’re still on a special rate deal or the standard variable rate (SVR). Meanwhile, 15% of borrowers with a special rate deal don’t have a clue when it’s due to expire.

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Perhaps this lack of understanding explains why some borrowers aren’t remortgaging when there are significant savings to be made. According to new figures from Yorkshire Building Society, 2.3 million borrowers are now on their lender’s SVR, but 75% now have less than 85% loan-to-value (LTV) meaning they are free to switch to deals which beat the SVR.

Right now, 28% of the total mortgage market consists of borrowers who are on the SVR. But research from lovemoney.com partner Moneyfacts reveals the average SVR isn’t particularly attractive at 5.04%.

Yorkshire BS reckons by remortgaging away from the SVR to the current best-buys, these borrowers could collectively save £1.8 billion a year in interest.

But what does ‘less than 85% loan-to-value’ actually mean? Quite simply, this means your mortgage is equivalent to less than 85% of the value of your home. In other words, you have an equity stake in your property of more than 15% based on the current valuation of your home and your outstanding mortgage loan. Mortgage rates are starting to improve for borrowers with 85% LTV, so if you’re currently on your lender’s SVR it may be time to look elsewhere.

The standard variable rate

The SVR used to be the rate borrowers would revert to once their fixed rate or tracker mortgage deal came to an end. Pre-credit crunch, the SVR was generally a lender’s least competitive mortgage and was the one borrowers really needed to avoid by remortgaging to a new deal each time the previous one expired.

But the financial crisis has changed all that. A series of cuts from the end of 2007 through to March 2009 saw the Bank of England base rate fall to its lowest ever level of 0.5%, where it has remained ever since. Although SVRs weren’t automatically linked to movements in the base rate, lenders often altered them when changes in the base rate took place. This meant SVRs became increasingly cheaper, making them a far better deal for borrowers.

But the lenders were quick to catch onto the possibility of lost profits if hordes of borrowers stayed on low-rate SVRs once their fixed and tracker deals had finished. So, these days, you’ll often find the SVR has been replaced by a more costly Existing Borrowers’ Rate, which is set at the lender’s discretion.

The table below shows the latest SVRs and existing borrowers’ rates for some of the UK’s largest lenders:

SVRs and Existing Borrowers’ Rates

*A long standing borrower rate of 4.54% also applies after the existing borrower rate of 4.79%.

You’ll see some SVRs still look highly competitive. In particular the SVR from Cheltenham & Gloucester/Lloyds TSB is currently just 2.50%. But this rate only applies at the end of an existing special rate deal if you originally applied for that deal before 1 June 2010, and you don’t remortgage early. Most deals taken out after this date now revert to a far greater variable rate of 3.99%.

By introducing an existing borrower’s rate, some lenders have restricted the availability of the cheaper SVR to their mortgage customers in one easy step. Sneaky eh?

Better deals to be had

For quite some time after the credit crunch, the SVR was indeed a decent choice for many borrowers. But now, if you have enough equity in your home - that is at least 85% LTV - you may be able to remortgage to a deal which beats the SVR or existing borrowers’ rate.

Related blog post

• John Fitzsimons writes:

  Should you get a fixed rate or a tracker?

  With interest rates languishing at record lows, is now the time to take advantage with a tracker, or go for the safe option of a fixed rate?

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For example, Britannia Building Society and the Co-operative Bank - the merged building society - is currently offering the most competitive tracker deal at base rate + 2.69% (current pay rate 3.19%) for three years. This mortgage comes with a product fee of £999 and is for borrowers who are remortgaging with at least 85% LTV.

Meanwhile, Yorkshire Building Society is offering three-year trackers deals at BBR + 2.99% (current pay rate 3.49%) with a product fee of £1,495, again for borrowers with equity of 15% or more.

These trackers rates will most likely compare well with the SVR you might otherwise be paying depending on who your lender is. That said, it may be a huge gamble to choose deals like these where the pay rates can only increase once the base rate begins to climb.

If you prefer the security of a fixed rate - which I think is the more sensible option right now - the best deals at 85% LTV are as follows:

Source: Moneyfacts

Again these two-year fixed rate deals may measure up well against your SVR  in which case there’s a compelling reason to switch now.

The decision may be even more clear cut if you’re currently on the SVR or existing borrowers’ rate and you have more equity in your home. For example, if you have equity of 25% - that is 75% LTV - you’ll be eligible for these deals:

At lower LTVs, the fixed rates shown above will beat most SVRs even taking the product fees and remortgaging costs into account. Plus, you'll know exactly what your mortgage outlay will be for the next two years, while an SVR could rise significantly over the same period.  

All you need to do now is decide whether you’re happy fixing your mortgage rate over two years. To help you decide whether to stick with the SVR or switch, speak to one of our fee-free brokers at the award winning lovemoney.com mortgage service.

Find the right mortgage for you at the lovemoney.com mortgage service

More: Getting a mortgage is about to get tougher | Buy a home with a 5% deposit

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.