Failure to take out a new mortgage on time could cost the average homeowner $278 per month

An average homeowner could face unnecessary costs of €278 per month if they forgot to renew their mortgage agreement on time, new research shows.

Nearly a third of homeowners let their mortgage slide for at least a month after the end of their fixed rate on their lender’s standard variable rate, according to a survey by personal finance website Finder.

The Standard Variable Rate (SVR) is the more expensive standard rate from a bank or building society that borrowers return to once their original fixed deal expires, if they do not remortgage immediately.

Many people coming to the end of their five-, three- or two-year fixed-rate mortgages today will have an interest rate of 2 percent or less.

If they fail to remortgage on time and fall under their lender’s SVR, they could fall to a rate of up to 9.73 per cent, depending on the lender.

> Read: Which lenders have increased the SVR mortgage interest rate to almost 10%?

The average amount on a fixed rate mortgage is currently £164,000, according to data from UK Finance.

Nicholas Mendes, mortgage technical manager at John Charcol, said: ‘It is generally not advisable for borrowers to stick with or switch back to an SVR unless the mortgage amount is very small or a property sale is imminent .

‘This is because SVRs are typically 3 to 4 percent higher than fixed rates. Alternative deals are likely to be struck with the existing lender, which would be more cost-effective.”

The best and the worst: The standard variable rate is set at the discretion of each lender and therefore varies widely

How much could switching to an SVR cost you?

According to Moneyfacts, the average SVR is currently 8.18 percent. The highest SVR on the market is 9.73 percent.

Someone with a £164,000 mortgage, repaid over 25 years at a rate of 2 per cent, would pay £695 a month.

If they were to return to the average SVR, their monthly payments would rise to £1,285 per month – a monthly jump of £590.

According to Moneyfacts, the average five-year fix is ​​currently 5.5 percent.

On a £164,000 mortgage, repaid over 25 years, it would cost £1,007 per month. That equates to a monthly saving of £278 if the homeowner had taken out a new mortgage in time instead of switching to SVR.

If they had 40 percent equity in their home, they might have been able to get an even lower five-year interest rate of 4.5 percent, or about 4.8 percent if they had locked it in for two years.

If you convert a £164,000 mortgage to a rate of 4.5 per cent, someone would pay £912 per month, which equates to a monthly saving of £373 compared to the average SVR.

> What next for the mortgage interest rate in 2024 – and for how long should you fix the mortgage interest rate?

How long do people spend on SVRs?

According to Finder’s research, the average person spends ten months on an SVR over the life of their mortgage.

It found that 11 per cent of mortgage holders have been paying a higher SVR for more than a year, while 3 per cent admitted they have been paying a SVR for more than five years.

Ultimately, borrowers have plenty of time to avoid falling on their lender’s SVR.

Most mortgage deals have a six-month term, meaning homeowners can sign a new mortgage deal six months before their current deal expires.

Sometimes life gets in the way and people close their new mortgage closer to the deadline, but keep in mind that the application itself often takes several weeks to complete.

According to mortgage broker Habito, the average mortgage application takes between four and six weeks.

> Read about one lender who claims to offer most mortgages within 24 hours

Liz Edwards, mortgage expert at personal finance comparison site, said: ‘It’s easy to leave renewals waiting for a while and even if you’re thinking about renewing your mortgage, if you leave it too late you may have to wait a month or two wait for the interest on your new deal. For mortgages, this can have a huge impact on the amount you pay.

‘The extra monthly costs are shocking in themselves, but to illustrate, if someone were to pay off a 30-year mortgage at the current average interest rate versus the current three-year average interest rate, they would pay an extra £180,000 in unnecessary interest . .

‘So set a calendar reminder and make sure you find a new deal well in advance before your regular deal expires.’