SVR mortgages make sense for some borrowers

Julia Harris, Mortgage Analyst at moneyfacts.co.uk, comments: “It is frequently reported that too many borrowers remain on a lender’s standard variable rate (SVR), paying over inflated rates of interest on their mortgage, but for some borrowers it may not be in their interests to switch.

“For the vast majority of us, checking out the best deals available and switching is of course the most sensible and financially beneficial option when our current fixed or discounted mortgage expires. But there are borrowers who will find it more expensive to switch lenders, even if the rates are substantially lower, as fees can eat away any possible saving. These will typically be borrowers who only have a few years remaining on their mortgage, and thus their mortgage balance will be relatively small.

“Take the example of a borrower, who 20 years ago took a 25-year mortgage of £30K. Today this mortgage would have five years left to run, with an outstanding balance in the region of £12K.

“With the average SVR currently 7.06%, a £12K mortgage over five years would cost a total of £14,082. Compare this to the current moneyfacts.co.uk best buy deal – Britannia BS at 5.24% with a fee of £399, with a total cost of £13,869.60. Switching would save you just £3.54 a month, and that’s not taking into account any exit fee which your existing lender may charge.

“So for many borrowers in a similar position, staying put with their existing provider, even if it means paying their standard variable rate could be the best course of action.

“Another point that is often overlooked is that borrowers with small mortgage balances will also find their choice of lenders and products is limited. Research by moneyfacts.co.uk found less than 60 lenders, under half of all current mortgage providers, will consider lending less than £15K and of these, many will be restricted to selected products.

“So if there is little or no financial gain to be made from switching providers, not to mention the hassle factor of finding and switching to a new provider, for some borrowers an SVR mortgage is still the right option. Although other interest rates may be lower, the total deal could prove to be financially unviable. SVRs are not always a ‘rip off’ rate, set to catch out borrowers who fail to switch their mortgage; they can be the right deal for some borrowers.”