With a mortgage being such a long-term commitment, lasting between 20 and 30 years, it’s no surprise that a lot of homeowners put them to the back of their minds after clinching that initial deal. What’s easy to forget, in the bustle of daily life, is that the favourable rates of most mortgage deals last just two to three years. After that, your deal defaults to your lender’s SVR, and – aside from a few letters and emails that you may forget about – no-one will take much trouble to remind you.
Mortgage broker Habito recently published research showing that at least one in four mortgage holders are currently on SVR mortgages, and the figure could be even higher (because a further one in five couldn’t remember whether they were or not). Those with an SVR are typically paying an extra £4k extra in interest each year – or over £300 per month. At the present time in particular, this is a huge dent in the housekeeping money.
How SVR became a severe issue
A lot of mortgage lenders may be overestimating how well their customers understand the mortgage process. Generally, if your mortgage deal is about to expire, you should try to remortgage to a new deal (to avoid the costly SVR). But many people simply aren’t doing this – they’re just letting their first deal lapse and doing nothing about it. The Habito research showed that that many are confused about the whole concept of remortgaging. Nearly half (46%) were unaware of this recommended practice, 25% thought remortgaging would mean more debt, and 10% thought that the higher monthly repayments would help them pay off their mortgage more quickly (when in reality, the extra money is pure interest). There is also widespread ignorance of the very terms ‘remortgaging’ and ‘SVR mortgage’.
In short, millions of homeowners simply aren’t paying enough attention to the biggest purchase of their lives. It seems that a large minority, having secured their mortgage in the first place, are then assuming the job is done – when in reality a mortgage is an ongoing commitment that needs servicing every few years to keep it running cost-effectively.
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What to do if you are a ‘mortgage prisoner’
Inaction isn’t the only problem, however. Many mortgage-holders would be delighted to remortgage – but find that they can’t. An estimated quarter of a million homeowners are so-called ‘mortgage prisoners’, stuck on an SVR mortgage against their will and unable to switch. This is often because of tighter lending criteria introduced since the 2008 financial crisis, resulting in borrowers being refused new mortgage deals on the properties on which they already have a mortgage.
Absurdly, this means that these homebuyers can’t remortgage to a deal that would result in far lower monthly payments than they are currently paying on their SVR mortgages. Many are therefore stuck paying interest rates of over 4%. What makes the problem worse is that many are with lenders who have ‘closed books’, meaning that they are currently inactive and cannot offer new deals. If they can’t get a mortgage deal via a different lender, they remain stuck on their punishing SVR.
If you find yourself in this predicament, the best person you can speak to is an independent mortgage broker. A broker has up-to-date knowledge of the whole of the mortgage market, so can give you the best chance of finding a new lender who may offer you a better rate.
Be a saver, not an SVR
If you’re on an SVR mortgage for any reason – whether it’s a change in borrowing criteria, a change in your circumstances, or simply forgetting to remortgage in time – then taking prompt action could help you save a significant amount of money every month. (Note that in certain circumstances you might have reasons for wanting to be on an SVR – for example if you’re near the end of your mortgage term and it’s not worth remortgaging.)
The Habito research suggests that the biggest reason for people to end up with an SVR mortgage is simply by accident. A missed letter, a busy life, forgetting the original mortgage term, or not understanding a crucial bit of terminology, may be all it takes to tip you onto the most expensive rates. What’s more, one in 10 (11%) of people said they were nervous of mortgage lenders looking into their finances at this time of economic uncertainty.
But when it comes to mortgages, the head-in-the-sand approach never helps. So long as you keep up monthly repayments, the worst that can happen is that nothing changes for you. By contrast, you could save around £300 a month, or even more, by contacting a mortgage broker today to find out what your remortgaging prospects really are. You may be pleasantly surprised.
