The mortgage deals that make sense only for the lenders

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The Independent Online

Just three little words but one big bill. The standard variable rate (SVR) offered by mortgage lenders is the costliest home loan on the market and rarely gives any value to borrowers.

Yet as many as one in five of us repay mortgages in this way, either unaware of the cost, unwilling to chase the best fixed rates, or unable to switch quickly enough from a previous, and cheaper, short-term deal.

Today, most SVRs hover between 5.5 and 6.5 per cent but they can rise as high as 6.79 per cent. Compared with table-topping fixed-term deals, which currently start from around 4.25 per cent, the extra annual cost to borrowers is considerable.

Last week, a survey from Moneyfacts highlighted the expense. According to the financial analyst, a £150,000 interest-only mortgage with a mid-ranking SVR at Leeds building society (currently 6.5 per cent) would have cost you £9,977.84 between 1 January 2005 and 31 December.

Compare this with a two-year interest-only fix at 4.49 per cent with Portman building society, taken out in January and covering the same period: it would have cost you only £6,735, according to separate calculations.

The same survey also underscored big SVR differences between lenders. The cost of an interest-only £150,000 loan with First Direct (SVR, 5.5 per cent) is £8,470.89 a year; at NatWest (SVR, 6.59) the figure is £10,084.

Most brokers stress that borrowers should not even bother comparing one SVR with another; they should just switch to a different deal.

Simon Tyler of Chase De Vere Mortgage Management says: "Nobody should ever pay their lender's SVR. Borrowers should remortgage to other fixed or discounted deals every few years before the SVR kicks in after their old short-term deal. Alternatively, if they want a longer-term mortgage, they should take a cheap lifetime tracker." These start from 4.85 per cent, he adds, and mean you automatically benefit from interest-rate cuts.

With any new, cheaper mortgage, make sure you don't face an extended "overhang", warns Melanie Bien of broker Savills Private Finance.

A new deal from Leeds building society illustrates the point. Its two-year fix is at a very low 1.89 per cent but it then reverts to its SVR for four years, with hefty exit penalty charges of up to 7 per cent of your loan if you redeem early.

James Cotton of broker London & Country points out that, after the initial two-year period, the monthly repayments could "more than treble".

Despite the downsides, there are circumstances in which you may be better off putting up with the SVR. If your mortgage is small - perhaps less than £35,000, says Mr Cotton - and you have less than a quarter of its term left to pay, it may not be in your interest to switch and pay the arrangement, valuation and legal fees for a new short-term deal.

Many people, meanwhile, don't want to keep chasing market-leading rates and prefer to stay with one lender. They should opt for a low SVR, says Ms Bien, while regularly checking the rate.

Lorraine Meek, from Lincolnshire, had stuck with Abbey on its SVR (currently 6.5 per cent) for a number of years until, last month, she remortgaged her flat to a two-year fix at 3.69 per cent with Norwich & Peterborough building society. Afterwards, she chose not to reduce her monthly repayments. As she explains: "The lower rate has meant I've switched from an interest-only mortgage to a repayment one - and borrowed an extra £10,000 for home improvements."

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