Mortgages  

Complacent borrowers miss out on SVR ‘pay rise’

Complacent borrowers miss out on SVR ‘pay rise’

Borrowers can effectively give themselves a ‘pay rise’ by switching to a more competitive mortgage deal, according to Legal & General Mortgage Club.

Swapping existing mortgages from the standard variable rate (SVR) to a more competitive product could save the average homeowner more than £2,000 a year, the equivalent of a 7.2 per cent jump in salary.

L&G’s analysis found homeowners on a competitive two-year fixed rate deal currently available on the market could save £171.85 a month (£999 added to loan and £295 required on completion) or £2,062.20 over a year, compared to borrowers who remain on a lender’s SVR.

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However, when presented with financial decisions such as this, borrowers react in many different ways, with the mortgage club demonstrating the impact small changes can have:

Types of borrower

1: The continually complacent

Despite speculation of a rate rise looming,and warnings that headline low rates won’t be around forever, they stick with current SVRs. Satisfied with their deal and not anticipating an interest rate rise impacting their monthly payments of £792.75, they risk paying an extra £681.72 per year every time the SVR increases by 0.5 per cent.

2: The flexible financer

Listening to a broker’s advice, they rethink their lender’s SVR of 4.74 per cent, switching to a two-year fix from a high street lender, with a rate of 1.69 per cent and a fee of £999. Despite the initial cost, monthly interest payments are down to £629.74, saving £221.20 each month and £5,308.80 over the fixed rate term.

3: The reluctant reviewer

Currently on an SVR from their lender, they are likely to wait until 2017 before shopping around. By then, banks may well be pricing higher rates into their products. Whilst saving money by eventually switching from an SVR, they do not save as much as those borrowers who acted earlier. If their lender’s SVR were to increase by 0.5 per cent before late 2017, they would only reduce their monthly payments by £183.89 a month and £4,413.36 over the fixed term.

Jeremy Duncombe, director of L&G’s Mortgage Club, said borrowers today are missing out on some great opportunities to save, mainly due to complacency.

“Now is the perfect time to review current deals, especially for those on an SVR or coming to the end of a mortgage term.

“Homeowners should contact an adviser to explore the idea of swapping to a different mortgage deal, which could give them the equivalent of a hefty pay rise,” he added.

peter.walker@ft.com