In fact, it could be responsible for you paying hundreds of extra pounds each month on your mortgage. Here’s how…
What is an SVR?
When you take out a mortgage, you will automatically be offered a deal by your mortgage broker or lender. This may be a fixed-rate or a tracker which lasts for two, five or even ten years or more and will have a reasonable rate attached.
When the deal ends you have two options. You can either remortgage or ‘switch’ to a new mortgage deal, a move which could see you sign up to a product which either rivals or betters the current rate you are on.
Alternatively you can do nothing. This option has one advantage in that you literally don’t have a lift a finger. There’s no need to shop for a new mortgage, speak to a broker or go through the remortgage process.
But there is a major disadvantage too… you will probably end up paying a lot more money each month. This is because if you don’t switch your mortgage your lender will automatically move it for you – to its very own standard variable rate (SVR). This is often a lot more expensive than your current deal and will almost certainly cost you more than any other new mortgages available on the market .
Saving £300 a month
In fact, according to research by online mortgage broker, Habito, 55% of mortgage holders could save nearly £300 a month by switching their mortgage.
Indeed, it explained, in most cases a lender’s SVR – also known as a reversion rate – was typically somewhere between 4.24% and 4.99%.
So, someone who had been paying a mortgage rate of between 1.89% and 2.29% during their introductory fixed-term could see their monthly payments jump by one third if they moved to the SVR.
Autumn remortgaging rush
This issue of SVRs and switching is about to become particularly pertinent. This is because October is expected to herald a huge surge in people coming to the end of some highly competitive two-year fixed rate deals.
According to financial analysts, Moneyfacts.co.uk, back in October 2017 the average two-year fixed rate plummeted to a record low. Indeed, the typical rate was at 2.21%.
It means those borrowers who took advantage of these rock-bottom rate deals will now revert to their lender’s SVR. Moneyfacts said this could potentially see their monthly repayments double.
“In fact,” said Rachel Springall, finance expert at Moneyfacts, “the average SVR today is 4.89% compared to the average two-year fixed rate today of 2.47%.”
How to avoid the SVR?
Avoiding the SVR is simple, you just need to switch to a new mortgage – a process known as remortgaging.
According to What Mortgage’s very own mortgage expert Jeni Browne, who is sales director at Mortgages for Business, the first step you should take is to speak to your current lender to see if they can offer you a good deal.
Then research the market to see what you can get elsewhere. She suggests finding a whole of market broker who will let you know the best rate, quickly rather than doing the work yourself.
She added: “The lender will want to value your home – your existing lender will probably do this via an online valuation tool, whereas if you approach a new lender, they will usually send a surveyor out to the property.
“Either way, I would suggest getting an estate agent to give you a valuation so when you are looking at options, you are considering products in the right loan-to-value (LTV) bracket.”
Springall echoed Browne’s advice and encouraged anyone due to remortgage to speak to an independent financial adviser to help them ‘navigate the mortgage minefield’.
She explained, that with current economic uncertainties, many borrowers were looking to lock into longer deals to protect themselves from future interest rate rises.
“Thankfully, there have been significant cuts to deals in the five-year fixed market, as well as more deals surfacing for even longer terms, such as 10-year and 15-year fixed deals,” she added.
Getting the best deal
As well as using a whole-of-market broker to help you navigate the broad marketplace, you can also ensure you bag the best rate by getting yourself ‘mortgage-ready’ before you switch. Here are some of Jeni Browne’s top tips to help you get prepared for a remortgage:
- Make sure you’re on the electoral roll.
- Get your paperwork in order. In support of your mortgage application you’ll need to provide proof of identity, address and income, plus three months’ bank statements.
- Check your credit profile. Make sure that it is accurate and rectify any inaccuracies.
- In the three months before applying for a mortgage, try to make sensible spending decisions – remember the lender will be looking at your bank statements.
- Make sure you pay any unsecured loans on time.
- Clear your credit cards if possible, or at the very least, make sure you’re not borrowing more than 75% of your credit limit.
- Avoid applying for any new credit.
- Avoid unauthorised overdrafts.
For more advice and tips from Jeni Browne visit our ‘Ask the Expert’ advice pages by clicking here.
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What Mortgage has teamed up with L&C to offer you expert advice on the right mortgage deal.
Whether you’re buying a new home, remortgaging to a new deal or buying an investment property, L&C can help – and you’ll pay no fee for their advice. To find out more, click here.
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