The Mortgage Clinic: 'Is it madness to go for a cheap SVR?'

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We're seeking another two-year fix but the best mortgage we can find is a very high 6.25 per cent. This is almost unaffordable for our £140,000 interest-only loan, and we've noticed that the standard variable rate on a rival bank – First Direct – is actually cheaper! Would it be madness to go for an SVR? GR, Northumberland

It's not madness, but it is, no doubt, a big gamble. Standard variable rates (SVRs) have crept on to homebuyers' radars, and it's not hard to see why. Last week, research from the financial analyst Defaqto underscored how fixed mortgages are becoming more unaffordable. Thanks to the credit crunch making it more expensive for lenders to borrow credit on the global money markets, the cost of an average two-year fix has risen from 5.42 per cent in December 2006 to 6.71 per cent today. Similarly, a two-year discounted variable-rate home loan has jumped from 5.3 per cent to 6.23 per cent.

However, while fixes are indeed more expensive, cheap SVRs are still few and far between. According to the analyst Moneyfacts, only 17 from a list of 111 different SVRs are cheaper than the average 6.71 per cent rate for a two-year fix. In fact, only six lenders carry SVRs charging less than your 6.25 per cent offer. The lowest of these is ING Direct, at 5.94 per cent, followed by Stafford Railway building society (5.99 per cent) and First Direct at 6 per cent – the deal you spotted. "Most SVRs have no fees, as opposed to most two-year fixes, which have an average fee of £1,000 – and no early repayment charges (ERCs) or penalties for switching at a later stage," says Mark Harris at the broker Savills Private Finance.

Harris warns not to underestimate the obvious downside of an SVR: its capacity to rise. "There's a feeling that inflationary pressures mean that interest rates will go up rather than down, which will lead to a higher SVR." You say that your mortgage repayments at 6.25 per cent are already a stretch? Choose an SVR that subsequently rises and you could be in trouble, says Richard Morea at the broker London & Country. "If a SVR rose by a percentage point, it would cost you an extra £117 a month on your £140,000 mortgage."

Given lenders' increasing choosiness about customers, there's no guarantee that any would accept you on their SVR. For example, Abbey has recently withdrawn its SVR to new customers.

An alternative is to weigh up a longer-term fix, where there's less demand for deals, and better rates on offer. The Clydesdale bank is offering a five-year fix at 6.19 per cent, says Mr Harris. "It has a £999 fee and is available at up to 95 per cent LTV."

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