SVR – The Great Mortgage Rip-off

Once upon a time ALL mortgages were Standard Variable Rate (SVR), and all SVRs were pretty much the same – building societies all moved their rates up or down together like a herd, every time the Bank of England changed the Base Rate. But ever since the banking crisis, when the Base Rate was slashed to 0.5% that model has been broken.

house rateNow SVR is no longer the standard – it’s the exception. Only about 20% of mortgages are now on SVR. And SVRs vary wildly – HSBC is the cheapest of the big six lenders at 3.69% and Santander is comfortably the dearest of the big six at 4.49%. Smaller lenders may have even higher SVRs – the Newcastle Building Society’s SVR is an eye-watering 5.99%!

 SVR has become the DEFAULT rate – it’s the rate you’ll pay if you don’t take out another fixed rate or discounted variable rate deal when your current deal ends. Citizen’s Advice recently published a study recently where they calculated how much extra it is costing you if you are currently paying SVR. First they compared SVRs to 2-year and 5-year fixed rate remortgage deals offered by the six biggest mortgage lenders:

Lender SVR 2-yr Fixed 5-yr Fixed
Lloyds/Halifax 3.74% 2.39% 2.94%
Santander 4.49% 1.64% 2.11%
Nationwide 3.74% 1.59% 2.04%
Barclays/Woolwich 3.74% 2.35% 2.45%
RBS/NatWest 3.75% 2.59% 3.15%
HSBC 3.69% 1.54% 1.94%

They calculate that on average an SVR mortgage is costing an extra £439 per year, compared to the cheapest fixed rate deal. That’s based on the average mortgage of £60,000. If your mortgage is bigger then the loyalty penalty you are suffering could be a lot higher. One in ten SVR payers are paying an extra £1,000 or more.

If we were all perfectly rational (which we’re not!), NOBODY would be paying the Standard Variable Rate unless they were mortgage “prisoners”, who are stuck with their current mortgage provider because of the new tougher lending rules, or because their income has fallen since they took out their mortgage. Yet more than half of the customers currently on an SVR have been paying an SVR for more than ten years.

“Do Nothing” Bias

Regular readers of this site will understand why most of us behave this way. When we’re not sure what to do for the best, our instinct is to do nothing. Few of us are interested in economics and interest rates. The offers are all bamboozling and difficult to compare, with all sorts of extra fees to factor in: application fees, booking fees products fees, valuation fees, redemption fees …

And some of us – particularly those of who are older or less financially savvy – may mistakenly think that something that calls itself the Standard Variable Rate is a perfectly fair rate to pay. Well it used to be, but now it’s not – it’s a rip-off.

Do something – Get advice!

 So don’t get stuck on a rip-off SVR. Look for a better deal. A lot will depend on your income and loan-to-value ratio. If your house is now worth a lot more than you paid for it, then the loan-to-value ratio will be a lot better and you could qualify for a cheaper deal. Fixed rates are currently very low by historical standards. We’ve rarely seen mortgage rates this low, but we’ve seen them a lot higher. Just look at this chart of interest rates since 1971.

Bank of England base rate 1971-2017
Bank of England base rate 1971-2017

There are hundreds of mortgage deals on offer, and it’s no easy feat to figure out which is the best for you. Fortunately, you can get advice from Independent Mortgage Brokers. The government’s Money Advice Service has a useful page on their website that explains how to go about this.

Martin Lewis’s MoneySavingExpert website publishes a free guide to remortgaging, which includes the following useful advice: Chances are that using the right type of broker will be the best bet for most people, as they can whittle down the top deals quickly and offer you an extra layer of protection if things go wrong.”

You don’t need to pay for this advice, as most brokers will get their fee from the lender. Don’t be bullied into making a snap decision or buying extra insurance products. Take time to think it over, and maybe talk it over with a friend.

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2 thoughts on “SVR – The Great Mortgage Rip-off

  1. Great blog – very interesting reading. Another factor worth considering with fixed rate deals is the punitive Early Repayment Charges that the lender may hit you with if you decide to sell up and pay off the mortgage. These need to be checked and weighed up before signing up. I quite liked being on a SVR for a few years while rates were so low because we were often considering selling during that time. Some very good long term fixed rate deals about now though…

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    1. Thanks Simon. Yes you’re right about cancellation charges – sometimes SVR is “the lesser of two evils”. Please share my blog with others who’d be interested or who might find it helpful.

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