Paying More Interest On A Standard Variable Rate? Why Should You?

Paying More Interest On A Standard Variable Rate? Why Should You?

Borrowers are paying more interest on a standard variable rate to the tune of nearly £15 billion, with typical interest rates of 4% and above. By not changing their mortgage at the end of each fixed period it can result in borrowers paying an average of £7,000 in mortgage interest a year. A borrower who hypothetically didnt change and kept their mortgage for the full 25-year term would pay interest worth 65% of their original loan.

Borrowers could save over £4,500 in annual interest by swapping to a 2-year fix residential mortgage. It has been revealed a staggering £15 billion of annual interest is being paid by mortgage borrowers sitting on their lenders’ standard variable rate (SVR) or their initial very first mortgage. There can be a number or reasons behind this such as forgetting they have a fixed term mortgage but can come down to changes in employment circumstances meaning the borrower may not want to inform the lender of the changes for fear of having their mortgage revoked.

Financial Conduct Authority (FCA) information from their internal data indicates 2.04 million UK mortgage borrowers with authorised lenders have been on an SVR for six months or more1, amounting to a quarter (25%) of all mortgage borrowers. With a typical loan of £173,6772 and an average interest rate of 4.39%3, SVR borrowers pay £7,5464 in annual interest – amounting to a cumulative total of £15.4 billion.

In comparison, a borrower with the same size loan but on a 75% loan-to-value (LTV) two-year fixed rate (1.76%) would pay just £3,012 in annual interest, or 60% less.

Borrowers who remain on an SVR for the full term risk paying 65% of their original loan in interest

If a borrower was to remain on a typical SVR for the full 25-year term of their loan, they would pay £112,683 in total interest. This represents 65% of their original loan (£173,677). Though this scenario is purely hypothetical, the scale of interest relative to the original loan would be similar to short-term, high-cost loans. The average payday loan of £250 would typically earn a payday lender £1505 in interest, representing 60% of the original loan. Though the payday loan and mortgage sectors are very different, this highlights the comparatively high cost of remaining on an SVR and just shows that clients should keep in regular contact with their mortgage broker to know what deals are out there in the mortgage market.

Standard variable rates have always been uncompetitive, but with rates falling fast in recent years, the lending distance between Standard Variable Rates and typical mortgage rates is becoming increasingly apparent. Lenders are cashing in on borrowers’ sitting on their hands, charging rates that are more than two times the rate they would charge to new customers.

Given so many borrowers end up sitting on an Standard Variable Rate rather than switching, there is a strong market for 5-year fixed products, which require little effort from the borrower but guarantee a mid to long-term competitive rate. A lack of flexibility can put some borrowers off these deals, so we would encourage lenders to consider products that allow borrowers to port or end their deal before the fixed period has ended without hefty charges. However, there is little motivation for lenders to do so given the considerable amount of funding they receive from SVR interest.

“Though it is ultimately the borrower’s choice, lenders are making significant profit by punishing customers for being loyal. The message to borrowers is clear: don’t fall into the Standard Variable Rate trap and always switch to a more competitive deal once your existing mortgage term comes to an end. An independent mortgage broker will always be able to advise on the most suitable deal on the market, noting other factors such as product fees and flexibility can be just as important as the headline rate.

Get in touch with Premier Expat Mortgages and let us show you how we can reduce your mortgage costs by changing lenders or mortgage products.