Updated 30 March 2022
At least 1 in 4 mortgage holders are needlessly losing money every month by paying the maximum interest – and it could be many more. And yet it’s now relatively much cheaper to obtain a 5-year fixed rate mortgage for longer-term certainty. Article by Nick Green.
Over a quarter of homeowners with mortgages have ended up on their lender’s maximum rate of interest, the Standard Variable Rate (SVR), and the figure may be nearly as high as one in two. Research by mortgage broker Habito has revealed that worrying numbers of borrowers are allowing their mortgages to lapse to the SVR, often without realising it or knowing that they have an alternative. As a result, thousands of homeowners may be paying £4,080 of additional interest each year.
The Habito research suggests that 27% of mortgage holders are currently on their lender’s SVR. This rate is typically much higher than the fixed and tracker rate deals offered by the same lender, and comes with the added disadvantage that it can rise entirely at the discretion of the lender, at any time. This makes it very difficult for homeowners to budget effectively for mortgage repayments, as well as costing them more money. A further 18% of survey respondents said they did not know if they were on an SVR mortgage – which makes it probable that many of these homeowners are.
The average SVR offered by the lenders in question was 3.53%, with the highest at 6%. Meanwhile these same lenders currently offer two-year fixed rates as low as 1.26%. On the average mortgage, this works out at around an extra £340 being paid per month, perhaps unnecessarily.
The research has highlighted alarmingly low levels of knowledge among mortgage holders, and a concerning lack of advice being taken with regard to this most important financial decision.
The accepted good practice recommended by mortgage brokers is to remortgage to a new deal when a current mortgage deal expires. According to the Habito research a slim majority (54%) of mortgage holders are aware of this – meaning that 46% are not.
Indeed, many homeowners seem to be thoroughly confused by what ‘remortgaging’ actually means. A large number (17%) believe it means taking on more debt (it can do, but usually it doesn’t). A few (8%) confuse it with taking out a second mortgage, and 6% just don’t know what it means. Similarly, 10% don’t know what an SVR mortgage is.
Most strikingly, the same number (10%) believe that the higher monthly repayments of an SVR mortgage will result in their mortgage being paid off sooner. This isn’t the case, as the extra money is simply due to higher interest on the loan. The idea that a significant number of homeowners might actively prefer an SVR mortgage for this false reason shows the dangers of a lack of mortgage advice. This also suggests that lenders are not going out of their way to keep their customers informed of this important information.
This simple lack of awareness is one reason why many homeowners are not remortgaging when they should. Another reason, however, may be fear. Over one in ten (11%) of people surveyed said they were frightened about lenders scrutinising their finances during this time of economic uncertainty. This may partly explain why remortgaging fell by 33% between February and November 2020. Homeowners on furlough or in a Covid-hit industry may be worried that their lender may consider them a risky prospect – but as long as they keep up their monthly repayments, the worst that can happen is that their remortgage application is refused. Given that their SVR mortgage is by definition the worst mortgage available to them from that lender, they have nothing to lose by applying to remortgage.
Habito’s founder and chief executive Daniel Hegarty said of their research, ‘So many homeowners admit they’re in the dark when it comes to remortgaging. But 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.’
This widespread ignorance about remortgaging, and the apparent reluctance of some to attempt it, means that homeowners are currently missing out on a significant opportunity. Taking out a five-year fixed rate mortgage is now cheaper, relatively speaking, than it has been for seven years. This is because the gap between two- and five-year rates has narrowed significantly, so that there is now only a 0.27% average difference between the two.
Over 2020, the average two-year fixed rate was 2.28% while the average five-year fix was 2.55%. On a £100,000 mortgage over 25 years, this translates to a difference of just £13 per month, or £312 over the first two years (at which point the holder of the two-year mortgage would have to remortgage, possibly on less favourable terms).
In other words, homeowners looking to remortgage can get a five-year fix almost as cheaply as a two-year one, and lock in the more affordable interest rates for half a decade. With rates still so low, and the economy still looking shaky, this can provide much needed security in the medium term. Mortgage repayments will become fully predictable for five years, and the dreaded SVR will also be held at bay for that period of time.
One downside of longer mortgage deals can be higher early repayment penalties. However, it is unlikely that rates will improve much over the next five years, and may well rise. Therefore it would be in most homeowners’ interests – if they are ready to remortgage, or currently on an SVR – to give serious thought to a five-year fix, after taking independent mortgage advice.