Thousands of borrowers on their lender’s standard variable rate (SVR) could slash their mortgage payments by switching to a fixed rate deal this week.
An SVR is a mortgage lender’s basic lending rate – and they can set it at any level they choose. Generally SVRs should move in line with the Bank of England base rate but many lenders are guilty of being keen to raise their SVR when the base rate increases but not decreasing it when the base rate falls.
The SVR is most often used as the go-to rate when a fixed deal comes to an end.
Which rates are available on SVRs?
An estimated 2.2million households are on a SVR paying an average of 4.8% interest. Some are much higher than this; Leeds building society’s SVR is 5.69%, Yorkshire building society 4.99% and Natwest 3.99%.
However, some lenders have more than one SVR, depending on when the customer took out the mortgage.
Some lucky Nationwide customers are on the building society’s “base mortgage rate” of 2.5% but this is only available to customers whose mortgages began before April 2009. Customers who took out mortgages later will revert to a higher SVR of 3.99%.
It’s a similar story at Lloyds – customers whose mortgages began before 1 June 2010 may be on deals which revert to an SVR of 2.5%. But customers who took out their mortgage later will find their deals revert to the “Homeowner Variable Rate” of 3.99%.
The reason for a two-tier SVR system with some lenders is because historically some lenders promised their SVR would never be more than a certain amount above the base rate. But when rates fell to an all-time low 30 months ago they found that sticking to this promise was costing them too much money – so they introduced an alternative SVR.
Lloyds’ SVR, for example, is guaranteed to be no more than 2% above the base rate. However, its Homeowner Variable Rate doesn’t come with such a promise.
The best fixed rates
Fixed rate mortgages mean you know what you’ll be paying each month for a certain period of time, typically two, three or five years. The good news is that fixed rates are currently at an all-time low, so this week is a good week to switch.
For example, Chelsea building society has a five-year fixed rate at 3.39% with a £1,495 fee. It also has a five-year fix with a higher rate of 3.99%, but a lower fee.
Two-year fixes are even cheaper. Chelsea has a two-year deal at 2.69%. However, it reverts to an “existing borrower’s rate” of 5.79% after two years - so if the base rate is still low in 2013, you’ll be well advised to switch again.
Barclays has a two-year fix at 2.68%, Yorkshire building society 2.79% and Market Harborough building society 3.25%.
Should you switch?
Generally you should only switch mortgage deals when you can do so penalty-free. Otherwise early repayment charges will probably wipe out any savings you make.
If you are on your lender’s SVR, then exiting the mortgage is generally penalty-free. As a general rule anyone paying a SVR of 3.5% or over, with at least 15% equity in their home, will benefit by switching to a new product, but not necessarily a fixed rate.
How much can you save?
Time to get out the calculator. To work out how much you can save – and therefore if it’s worth switching – you need to look at what you’re paying now and compare it to a new deal plus fees.
For example, if you have a £150,000 mortgage on the average SVR of 4.8% you’ll be paying £600 per month interest-only, a total of £14,400 over two years.
If you switch to Barclays two-year fixed at 2.68% with a £999 fee, you’ll pay £9,039 over two years. That’s a saving of £5,361 – well worth the hassle of switching.
However, borrowers on SVRs as low as 2.5% should stay put on their current deal unless they are worried about rates going up in the near future. Even then, it’s unlikely rates will rise quickly and make switching to a fixed rate now a good idea.
Talk your options over with a broker and they will do all the calculations for you.
But generally, expert predictions for the first rate rise from 0.5% seem to be getting pushed back time and time again. Some economists predict it won’t be before 2014 that we see interest rates increase.
Top fixed rates for remortgagors
Here are some of the best fixed rates around for remortgagors:
|
Lender |
Type of rate |
Rate |
Fee |
Maximum loan-to-value |
|
2 year fixed rate |
2.48% |
£1,995 |
60% |
|
|
2 year fixed rate |
2.64% |
£999 |
60% |
|
|
3 year fixed rate |
2.89% |
£999 |
70% |
|
|
3 year fixed rate |
3.19% |
£99 |
70%
|
|
|
4 year fixed rate |
2.99% |
£1,999 |
60% |
|
|
5 year fixed rate |
3.79% |
£999 |
70% |
|
|
5 year fixed rate |
3.99% |
£99 |
70% |
|
|
7 year fixed rate |
4.89% |
£0 |
75% |
|
|
7 year fixed rate |
5.49% |
£0 |
85% |
|
|
10 year fixed rate |
5.85% |
£0 |
85% |
Source: The lovemoney.com mortgage comparison centre
More: Why we need 95% mortgages |Interest rates to stay unchanged until 2012