New analysis suggests SVR mortgagees could save considerably with a 10 year deal
Residential borrowers in the UK on their lender’s Standard Variable Rate (SVR) could save over £25,000 in mortgage interest alone over the course of a decade simply by switching to a 10 year fixed deal, it is suggested.
An analysis of mortgage rate data by Private Finance also says that the savings achieved by moving to a new deal could be used to make overpayments, leaving borrowers able to pay off their loan more than five years early.
The report says that data from the Financial Conduct Authority (FCA) indicates that 2.04 million UK mortgage borrowers with authorised lenders have been on a reversion rate or SVR for six months or more, amounting to 25% of all mortgage borrowers.
The latest data from the Bank of England puts total UK mortgage debt at £1,403 billion in the first quarter of 2018 and the firm says that, assuming the 25% of SVR borrowers have the same 25% share of total mortgage debt, giving an average loan of £171,936, this would mean £351 billion of mortgage borrowing is being charged at lenders’ SVRs.
The average SVR was 4.33% in August 2018 according to the Bank of England. An SVR borrower with the typical loan of £171,936 would therefore be paying £620 per month in interest alone and would have made £64,938 in interest payments over a 10 year timeframe.
However, if they switched to today’s average 10 year fixed rate of 2.73%, they would pay £229 less in interest each month, making a saving of £25,123 over 10 years. Swapping to today’s best buy 10 year fixed rate of 2.39% results in even greater savings of £278 monthly or £30,304 over 10 years.
It also says that overpaying could knock more than five years off an ex-SVR borrower’s mortgage term. Taking into account both principal and interest payments, a typical SVR borrower on the average rate of 4.33% would pay £939 a month in total, or £281,834 over the full 25 year term.
Swapping to the average 10 year fixed deal would reduce this monthly payment to £791, resulting in a £148 saving. If the same borrower was to take this deal but put their savings to use by making additional payments of £148 per month, they would be debt free five years and three months sooner than if they didn’t make any overpayments. Borrowers able to qualify for a best buy rate could be free of their mortgage even earlier at five years and 11 months.
‘Borrowers lingering on their lender’s SVR will find themselves subject to much higher than average interest rates. When it comes to mortgages, it pays to be proactive, so swapping to a new deal as soon as the initial offer ends is recommended. Our analysis shows the savings from doing so can run into tens of thousands of pounds over the course of a typical mortgage term, making it well worth the effort,’ said Shaun Church, director at Private Finance.
‘With the Bank of England recently upping interest rates, many borrowers coming to the end of their current deal will be looking to lock into a fixed rate product. 10 year fixes offer a decade of immunity from future rate rises for a relatively affordable price, as the price gap between shorter and long term fixes has been narrowing in recent years,’ he explained.
‘Although taking on such a long commitment won’t be for everyone, borrowers looking to ensure financial stability for the foreseeable might well be tempted to switch to a 10 year deal,’ he added.