Half a million homeowners are on ‘rip-off’ mortgage rates of up to 9.24% due to easy mistake
HUNDREDS of thousands of homeowners are paying extortionate mortgage rates after making a crucial error at the end of their existing deal.
Borrowers who fail to take out a new mortgage in time before the term ends are automatically shifted on to their lender’s Standard Variable Rate (SVR) where costs can top 9.24%.
These default rates are typically far higher than fixed or variable deals and the difference can translate into a into hundreds of pounds extra on mortgage bills.
The average two-year fixed rate is currently 5.66 per cent, according to data site Moneyfacts.co.uk, while the average five-year fix is 5.3 per cent.
In comparison the average SVR is a whopping 8.16 per cent.
The difference means that on a mortgage of £200,000, you’d be looking at a monthly repayment of £1,247 on a typical two-year fix or £1,204 on the five-year equivalent.
Whereas on the typical SVR you’d be paying £1,556 – £352 more than the five-year average.
Over a year that adds up to £4,224 difference.
Experts have warned that falling on to an SVR is a costly mistake to avoid.
Martin Stewart, broker at London Money, said: “The greatest gift to any lender is client apathy.
“There are hundreds of thousands of clients currently sat on high variable rates, even with the bank base rate cut in August, most lender SVRs are likely to be over 8%.
“Alongside apathy, there is also ignorance and many borrowers may not realise that their lender will allow them to switch effortlessly to a new rate at the flick of a switch.”
When you come to the end of your mortgage, your current lender will usually offer you to switch to a new deal – it tends to be an easy process and you can switch as much as six months before your deal ends to make sure you don’t sli[ on to an SVR.
Even if you’re in difficulty, your lender should help you find the best deal for your circumstances.
Chris Sykes, technical director at broker Private Finance, said: “There are very, very few scenarios where I would ever recommend a borrower be on an SVR…
“The vast majority of lenders allow you to product transfer from one rate to another without any further affordability checks.”
“The only real situation, i’d recommend a client be on an SVR is where they’re looking to sell the property in the very near future.
“If they’re looking to sell it in the longer term, it’s probably better to go on to a tracker rate with no early redemption fees.”
Tracker mortgages have variable rates, but are likely to be lower and linked to the BoE base rate than SVRs.
Unlike fixed-rate mortgages it’s easier to find tracker mortgages without any early repayment fees so you can exit the deal if you sell your home, for example.
SVR rates can move up and down at any time but lenders often adjust these rates in response to changes in the Bank of England base rate.
However, critics pointed out that is not always the case. And some lenders are much slower, for example, to react to a cut in the base rate than an increase.
Nicholas Mendes, mortgage technical manager at broker John Charcol, said: “Unlike fixed or tracker rates, lenders can increase or decrease their SVR by any margin they choose, making it unpredictable.
“This unpredictability makes financial planning challenging, as your mortgage costs could rise rapidly if interest rates increase.”
Should you fix your mortgage now?
If you’re looking for peace of mind over your mortgage payment a fixed rate deal is likely to be the best option.
Your repayments won’t rise, or fall, for the duration of the deal so you can budget with confidence.
Most fixed-rate mortgages come with large early repayment fees, so if you believe you could want to exit the deal before the term ends – for example, if you move home – a variable rate without exit fees may be a better bet.
A good independent mortgage broker can help you weigh up the pros and cons of different mortgage options.
How to get the best deal on your mortgage
IF you're looking for a traditional type of mortgage, getting the best rates depends entirely on what's available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.