Why mortgage borrowers need to know their fixed-rates from their SVRs

Why mortgage borrowers need to know their fixed-rates from their SVRs

Tepilo analyses new research which suggests that the UK’s six biggest mortgage lenders are penalising people who slip onto their SVR products.

Britain’s six largest mortgage lenders - Lloyds, Nationwide, Santander, RBS, Barclays and HSBC - are penalising customers who slip onto their Standard Variable Rates (SVR) with a £3,242 increase in yearly interest repayments.

That’s according to new research carried out by online mortgage broker Trussle.

The sector study, entitled the Mortgage Saver Review, is the first research of its kind to compare average SVRs and two-year-fixed rates from 76 lenders over the period of half a year.

It found that borrowers using the UK’s six biggest lenders – which account for 69% of all lending in the mortgage market – would witness their monthly interest rate leap by an average of 2.5% when automatically transferred from a two-year fixed rate to an SVR at the end of the fixed period.

While the majority of Britain’s 11.1 million mortgage borrowers take the decision to remortgage before they are transferred to an SVR, many don’t.

The research revealed that, of the three million UK households currently on a lender’s SVR, approximately one million are in the position of being ‘mortgage prisoners’. In other words, they are unable to switch, marooned on an SVR, with the introduction of stricter borrowing rules meaning they are failing to meet the criteria for a new mortgage.

Still, though, the other two million people on SVRs could switch immediately, according to the findings. This group account for 18% of the mortgage borrowing population and, Trussle’s study says, are together ‘overpaying lenders by £9.8 billion’ per year.

One of the main reasons why people are left languishing on SVRs is a lack of awareness among borrowers about the better alternatives out there. We looked previously at how too many homeowners are stuck on pricey SVR mortgages and why so many are unwilling to switch – the research carried out by L & C Mortgages at that time largely tallied with Trussle’s findings, with people unaware of the possible benefits of switching mortgages and too scared or hesitant to take decisive action.

This research highlighted the issue further, with two thirds (65%) of UK mortgage borrowers unaware that a lender’s SVR is typically worse value than a fixed rate. Meanwhile, one in four (24%) said they had no clue what SVR actually stood for.

What’s more, nearly half (48%) of those surveyed said they didn’t know when their fixed rate period comes to an end and therefore wouldn’t know when they would automatically be moved to their lender’s SVR. Delaying a remortage by even one month would set borrowers back £272.50 at one of the UK’s big six lenders, the findings showed.

Another thing that puts people off switching is the hassle and stress they think it would cause, with many having negative experiences when securing their first mortgage and eager to not go through that process again if possible. This negativity prevents people from proactively managing their loan and ensuring they have the best possible deal.

Some 41% of the borrowers surveyed had a negative experience when securing their first mortgage, with 8% even being reduced to tears by the process.

Ishaan Malhi, CEO and founder of Trussle, says the above findings showcase the need for the mortgage sector –and big lenders in particular – to educate borrowers “and simplify a raft of unfair practices”.

He added: “Borrowers are being put at a huge disadvantage by not understanding the implications of lapsing onto their lender’s Standard Variable Rate. This costs UK homeowners an alarming £10 billion a year in interest payments.”

He said the challenges can be addressed by the government, the industry and its regulators cooperating to make things more clear-cut, with possible solutions including a reasonable upper limit on SVRs and a system where lenders are compelled to warn mortgage customers about the end of their fixed rate well in advance, as well as confirming that borrowers have received this notification.

From a borrower’s perspective, educating yourself is key. Currently, you may not be able to rely on your lender to give you the full lowdown on the mortgage market, but it’s a good idea to regularly review your mortgage (at least once a year) to ensure you have the best possible deal.

You don’t want to be needlessly overpaying or languishing on a costly SVR if you don’t have to. You should make sure you know exactly what mortgage you are on, what interest rate you are paying, and when exactly your fixed-term period ends.

We know mortgages can be a tricky business, but help, advice and guidance is available – whether it’s through mortgage advisers or specialist mortgage websites. Lenders have their own mortgage teams in-house, while independent mortgage experts are also available.

Billions of pounds are potentially being wasted by homeowners not being on the most suitable mortgage for them. At a time of record low interest rates and mortgage borrowing costs, that shouldn’t be the case.

Too many people – through fear, reluctance or a lack of awareness – are unwilling to switch mortgages, but as these findings and others have made clear, a different path is possible.  

If people are more aware of mortgages, their own individual mortgage circumstances and the various options on offer, the chances of paying over the odds when it’s not necessary are dramatically lowered.

Mortgages might not be cool or easy to understand, but it pays massively to have a good understanding of them.