More than one in four homeowners is on their mortgage provider’s highest rate – and some rather oddly think it will help them pay off their loan quicker, according to new research.
Research by online mortgage broker Habito found that 27 per cent of people were on a standard variable rate - lenders’ ‘default’ interest rate which buyers drop on to when the initial term of their arranged mortgage deal ends.
Being on an SVR at one of the big six UK lenders could cost them an additional £4,080 each year compared to those lenders’ cheapest deals, Habito said.
Remortgaging away from an SVR could save homeowners thousands of pounds a year
The average lowest two-year deal offered by these lenders was 1.26 per cent, while the average SVR was more than twice this at 3.53 per cent. Other lenders have SVRs as high as six per cent.
In addition, almost one five people surveyed did not know whether they were on their lender’s SVR or not.
Habito’s research revealed a worrying lack of awareness about remortgaging and the reasons why people do it. Alarmingly, one in ten people believed that, because their monthly payments were higher, the SVR would allow them to pay off their mortgage more quickly.
WHAT IS AN SVR?
As with savings accounts, energy bills and car insurance, mortgage lenders will offer you an enticing fixed-term deal to draw you in before moving you on to a less lucrative one later.
A lender’s standard variable rate, also known as a reversion rate, is the rate your lender will move you on to when your initial period of two, three or five years is up - unless you remortgage.
Your SVR can be two or three times more expensive than the rate you were on before - and because it is variable, what you pay can change each month. Unlike a tracker mortgage, it is not tied to the Bank of England base rate - so the lender sets the rate themselves.
However, there are some benefits to being on an SVR. Most don’t have an early repayment charge, so you can overpay or exit the mortgage without fees. Arrangement fees are also low, but this is negated by higher interest.
SVRs are the only option for people who cannot remortgage - either because they have very little equity in their home, or have almost repaid their mortgage and therefore don’t meet lenders’ minimum lending thresholds.
This is not the case as the extra money is being paid in interest, rather than towards the mortgage balance.
Fewer people are remortgaging
Despite offering cost savings at a time when more people are worried about their financial security, the Bank of England’s most recent data showed that remortgaging dropped 33 per cent between February and November 2020.
Habito found that this was partly due to misconceptions about remortgaging.
One in six (17 per cent) of respondents said it involved taking on more debt, or was something that people did ‘out of financial necessity’.
Six per cent did not know what remortgaging was at all, while eight per cent thought it meant taking out a second mortgage on the same home, also known as a second charge mortgage.
Others were worried about lenders scrutinising their finances in the current economic climate - something that applied to 11 per cent of people surveyed.
Just over half of respondents (54 per cent) knew that remortgaging was typically done to switch to a more competitive interest rate and save money on your repayments.
Daniel Hegarty, founder and chief executive of Habito, said: ‘With the UK likely facing another year of uncertainty, it is more important than ever to ensure you aren’t paying over the odds much on your mortgage.
‘If you’re on a 2-year fixed rate, then do make sure you have a regular cycle of refinancing. We see remortgaging a bit like switching utility or broadband providers, but with bigger returns.
‘There are lots of options for remortgaging out there - whether you’ve been furloughed, have experienced a reduction in income or you’ve taken a mortgage payment holiday, your lender should be open to you doing a product transfer with them.’
HABITO'S REMORTGAGING TIPS
1) Make sure your credit score is the best it can be ahead of your fixed term ending, to maximise your chances of getting a good deal when you remortgage
2) Start early. Remortgaging can take a few weeks, so start thinking about switching about three to four months before your fixed period ends
3) Use a mortgage calculator to work out how much you could save. Habito has one here
4) Speak to a mortgage broker to get advice on the best deal
5) Watch out for any extra fees associated with your new mortgage deal. Take these into account when calculating your monthly costs to make sure you are getting the cheapest possible deal