Mortgages: A good rate isn't standard

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The Independent Online

Saying au revoir to their SVR is usually one of the quickest ways for borrowers to cut costs.

The standard variable rate is the "central" rate of lending used by each bank or building society and is affected, although not dictated, by the Bank of England base rate. Compared with other deals offered on mortgages, such as trackers, discounts and fixes, it is notoriously expensive.

Many lenders, including the Halifax, Abbey, Woolwich and Coventry building society, last week raised their SVR to reflect January's shock quarter-point rise in the base rate to 5.25 per cent.

"Many SVRs are now above 7 per cent and yet you can get a fixed rate for around 5 per cent and a tracker for even less," says Melanie Bien of broker Savills Private Finance.

Abbey's SVR, for example, rose to 7.34 per cent on 1 February, while the Woolwich's ticked up to 7.39 per cent. Specialist lenders have raised their SVRs to even higher levels.

If the base rate is hiked by another 0.25 per cent this week, as some commentators are predicting, homeowners will have to brace themselves for further increases. As many as 30 per cent of home loans are on the SVR, says Darren Cook of financial analyst Moneyfacts.

"Lenders will not disclose actual statistics," he says. "This would amount to voluntarily stating that a certain amount of borrowers are paying over the odds for their mortgage. Really, lenders should be on the phone to these borrowers directing them to a better deal."

But in some cases, there may be a good reason to stick with your SVR.

"If you are moving home in the next few months, it might not make sense to switch to a cheaper deal if it also comes with tie-ins and early repayment charges," warns Ray Boulger of broker John Charcol.

This is because you may find the terms of your new mortgage deal don't allow you to increase the amount borrowed. If you need extra finance to move home, you may have to break the deal, and pay a penalty to do so.

When on an SVR, you will not be tied into a deal, so hanging in there for a few more months at least gives you the flexibility to redeem the loan penalty-free.

You may also be better off sticking with the SVR if you have a very small mortgage balance, usually around £30,000 or less. This is because the monthly saving may not justify the cost of switching.

"An average arrangement fee now costs around £600," says Louise Cuming of the price-comparison service Moneysupermarket. "Then you might have a valuation and legal fees to pay, as well as an exit fee from your existing lender. The average exit fee is £200 but Alliance and Leicester charges £290.

"If switching saves you £10 a month on a small mortgage, the fees probably won't make it worth it."

However, there are deals available where the borrower doesn't have to fork out a penny if they want to leave. For those with a deposit of at least 20 per cent of their property value, the Woolwich has a lifetime tracker payable at base rate plus 0.39 per cent, giving a current pay rate of 5.64 per cent. This is 1.75 per cent cheaper than paying the same lender's SVR, equivalent to a monthly saving of £219 on a 25-year £200,000 repayment mortgage.

Ms Bien says: "It used to be the case that you could justify being on the SVR if it was only for a short while. Perhaps you were planning to move or had just a small mortgage left. But now there are a number of penalty-free trackers that you can get out of at any time."

When switching to a tracker loan, make sure you choose one that is linked to the base rate rather than an SVR, as lenders are within their rights to increase SVRs by more than the base rate.

Tracey and Brian Lutman from Bexhill-on-Sea in East Sussex have been paying Nationwide's Base Mortgage Rate (the lender's SVR) since their fixed-rate deal expired a year ago.

The repayments on their three-bed bungalow went up on 1 February when the building society increased its BMR to 6.74 per cent, but the couple intend to stick with their current deal.

Mrs Lutman, 48, a catering manager for the NHS, says: "We only have £14,000 left on the mortgage, which we're scheduled to clear in one year and seven months, so it's not worth the potential costs and hassle of switching.

"Nationwide's BMR is comparatively very low anyway and we have been more than happy with the lender. We're aware our payments will increase but they were only £80 a month anyway, so it's not going to make much difference. It's all swings and roundabouts."

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