Hundreds of thousands of mortgage holders could “suffer in silence” from standard variable rates, with their lender jacking up their monthly payments as rates continue to rise.
SVRs, also known as reversion rates, are the lender default rates that people move to when their fixed term ends and they don’t take out another mortgage.
The rate is subject to change by lenders at any time and will usually increase when the base rate rises, although they may increase by more or less than the Bank of England’s move.
‘Standard’ deals: Standard variable mortgage rates are often higher than a lender’s equivalent fixed or tracker
As fixed rates have risen in recent weeks due to swap rate volatility, many SVRs have also risen. Currently, around 773,000 borrowers have an SVR mortgage, according to figures from UK Finance.
Borrowers should be careful, as rates are often much higher than the lender’s fixed rate or tracker alternatives. For example, Virgin Money currently offers a five-year fixed rate mortgage at 5.65 percent for borrowers with 5 percent equity, but the equivalent SVR is now 8.74 percent.
On a £200,000 loan, moving from the fixed deal to the SVR would increase monthly payments by £397 from £1,246 to £1,643. Adding almost £5,000 a year to your mortgage payments.
The current average two-year fixed-rate mortgage is now 5.90 percent, according to Moneyfacts, and the five-year is 5.54 percent. The two-year average tracker rate is 5.48 percent, while the current average SVR rate is 7.52 percent.
> Borrowers can find the best mortgage rates to apply for using This is Money’s mortgage finder
Why do people end up with a standard variable rate?
“People on SVRs aren’t aware they’re on them, or fearful lenders will withdraw their mortgages because of a change in financial conditions,” said Nicholas Mendes, mortgage technical manager at John Charcol.
“The second group is concerned that if they went back to their lender for another fixed rate, their finances wouldn’t allow them to re-mortgage – so they suffer from higher SVRs in silence.”
Some borrowers in this group may be mortgage inmates, borrowers who took out a loan before 2004 and are now unable to re-mortgage despite being aware of mortgage payments, due to changes in how lenders calculate affordability.
Rising Rates: As the cost of borrowing has risen, standard variable rates have also risen, putting pressure on homeowners
In 2019, the Financial Conduct Authority introduced amended mortgage assessment criteria for stylist borrowers, which were based on their payment history rather than affordability.
In 2021, however, it turned out that the new rules had only directly led to about 200 switchers.
Rachel Neale, lead campaigner at the UK Mortgage Prisoner Action Group said: ‘Borrowers who struggled for 15 years at just under 5% are now sinking below unsustainable rates of 9% and above.
“With a further looming Bank of England rate hike on the horizon, historic mortgage inmates fear they will be stuck with rates above 10 per cent.”
> What to do if you cannot pay your mortgage: We explain what your options are if you are struggling to pay the rising interest rates
What can you do while on an SVR?
Firstly, it’s worth contacting your lender or speaking to a broker to determine your situation and whether a switch is possible.
“It may feel like a scary conversation, but establishing affordability is essential for any mortgage application or product switch,” says mortgage broker Matt Coulson of Heron Financial. “There are still options for anyone who is concerned about falling outside these parameters because of the cost-of-living crisis.”
It is rare for brokers to recommend an SVR product to borrowers for more than a short period of time, such as between the end of a fixed rate and an ongoing property sale.
While the market is a tougher place, the vast majority of mortgage advisors won’t charge a dime to research what’s possible, so there’s no harm in exploring your options
Some have chosen them as a stopgap during times of high interest rates, for example in the fall of 2022, when some fixed interest rates rose above 6 percent and borrowers didn’t want to hold on to that price.
“Nowadays, lenders will more often than not give borrowers the option of transferring their mortgage rate to a new one without any additional insurance [therefore avoiding new affordability checks] so a first port of call could be a great way to save money for some of these borrowers,” said Chris Sykes, technical director at mortgage broker Private Finance.
“While the market is a tougher one, the vast majority of mortgage advisors won’t charge a penny to research what’s possible for a client, so it doesn’t hurt to explore your options and see if better rates are available.
“It can save you thousands if not tens of thousands in interest costs instead of staying on SVR.”
Stuck: Borrowers whose financial circumstances have changed may feel trapped in SVR rates as they worry their lender will deny them another loan
Similarly, L&C’s David Hollingworth says that if switching to a new lender could prove difficult, there could be an option from the current lender that could still avoid the need to pay an SVR, and not a reassessment of the affordability would require a like-for-like basis when switching.’
Another option may be to switch to your lender’s tracking rate, which is often lower than an SVR and doesn’t charge penalties for switching to a flat rate when the time is right, Mendes says.
‘These trackers are often cheaper than SVRs. Barclays has a standard variable rate of 7.99 percent, while you can opt for a Barclays two-year tracker of 4.62 percent with no prepayment fees.”
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