New deals after the discount

If you're stuck with a variable rate mortgage, it may be time for a financial overhaul, says Stephen Pritchard
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As many as one in three homeowners pay what mortgage lenders call their "standard variable rate" (SVR). But these rates - most often paid by borrowers after a fixed or discounted mortgage has expired - are almost always the most expensive loan a lender has to offer.

Borrowers who are on an SVR-based mortgage can pay as much as 2 per cent over the Bank of England's base rate. They may also be paying more than new borrowers opting for a no-frills, variable rate mortgage. Increasingly these are tracker mortgages that charge a fixed percentage over base rates. In almost all cases, this is a lower rate than the lender's SVR.

Ray Boulger, the senior technical manager at mortgage brokers Charcol, points out that Birmingham Midshires offers a tracker mortgage priced at 0.51 per cent below Bank base rates, albeit with a high arrangement fee of £699. For smaller loans, Woolwich offers a two-year discounted deal, currently costing 4.89 per cent.

Anyone paying more than this should be considering switching lenders, mortgage advisers suggest. However, one reason a homeowner might be paying a standard variable rate is because they had taken out a fixed or discounted mortgage, and the special rate has now expired.

The majority of home loans now on offer have no penalties for switching beyond the period of the special rate, but there are still some "overhanging penalty" mortgages around, especially those with deeply discounted initial rates. And there will be plenty of borrowers who took out this type of mortgage a few years ago, when they were more common than they are now.

According to David Hollingworth, a director at mortgage brokers London & Country, some older-style loans tie borrowers to the lender's SVR for as long as four years, with harsh penalties of up to 7 per cent of the loan.

Even so, it might be possible to save money by switching. The differential between the best rates on the market and most lenders' SVRs has widened in the last couple of years, not least because some banks and building societies have put rates up by more than the Bank of England's recent rises. Hollingworth points to the example of Bristol & West, which recently increased rates by 0.3 per cent after the Bank of England added 0.25 per cent to base rates.

In some cases, it is still worth a borrower's while to accept a penalty and move from an SVR to a better deal elsewhere. "It is still worth looking at switching, even if you are locked in," Hollingworth says.

This is especially the case for homeowners who are worried about base rate rises, and are considering a fixed or capped rate deal. There is a trade off between paying a redemption penalty and having longer-term peace of mind. Borrowers should, though, approach their existing lenders first to find out the exact cost of the penalty, and whether there is a better deal on offer from that bank or building society. Some lenders now offer existing customers who remortgage all the rates on offer to new borrowers. In some cases, lenders might be willing to cut redemption penalties a little in order to keep a customer.

Other lenders, however, offer existing borrowers so-called "retention deals". At Charcol, Boulger says these are simply a euphemism for a loan that is more expensive than new borrower deals. "It is always worth asking what is on offer from your lender, but if they cannot offer a good deal, then you will be looking at remortgaging." A large proportion - perhaps the majority - of borrowers with SVR mortgages have smaller, older loans. Inertia may well be one reason why homeowners do not shop around. Borrowers with larger loans will typically pay closer attention to the cost of their mortgage, advisers say, and so are less likely to end up stuck on an uncompetitive rate.

And few, if any, borrowers buying a home would be advised to consider an SVR mortgage. Hollingworth says that some clients do mix an SVR mortgage with a larger fixed loan, usually because they expect to be able to repay some of the mortgage in the near future and want to be able to do so without penalty. But borrowers who want a flexible deal can usually pick up a more attractive, tracker deal. Many offset mortgages also fall into this category.

Some borrowers may have to accept an SVR loan because they have a problematic credit history and are unable to find a better deal elsewhere, cautions Boulger. But even in the sub-prime lending market, competition means there are some good deals around. But unlike savings accounts, where banks are obliged to tell their customers if a better rate is on offer, there is no such duty for mortgages. The onus is on borrowers to shop around, and paying the SVR should be a warning sign that you need to examine your mortgage deal.

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