Two million mortgage borrowers could save £4,500 a year by switching to a better fixed rate, analysis by broker Private Finance has shown.
Their research shows that borrowers on standard variable rates (SVR) usually pay interest rates of 4% and above, costing approximately £7,500 more on average every year. For a borrower that chooses to stay on an SVR for 25 years, it would mean paying interest worth 65% of their original loan.
Lenders exploit borrowers inertia
Standard variable rates have always been more expensive, largely because borrowers are not expected to stay on them long-term. The fact that a large number of borrowers are failing to seek a new deal and are remaining on an SVR means that lenders are cashing in on rates almost twice what they are charging new borrowers.
Borrowers pay £15.4bn a year in interest
Private Finance state that with the typical rate on a 75% LTV loan being 4.39% this equals an annual interest payment of £7,546 on an average loan of £173,677. By comparison, an average two-year fixed rate of 1.76% at 75% LTV equals an annual interest payment of £3,012.
One-quarter of mortgage borrowers have been on an SVR for six months or longer
Data from the Financial Conduct Authority shows that 2.04 million mortgage borrowers have been on an SVR for six months or longer, paying considerably more than they need to for their mortgage. Whether this is loyalty to their lender or financial apathy the result is the same – if they stay on an SVR long term the interest rate is comparable to the scale of interest on ‘payday’ loans.
Borrowers encouraged to switch to 10-year fixed loans
Director at Private Finance, Shaun Church stated that they believe there is a strong market for 10-year fixed products to provide borrowers with a long-term competitive rate with minimal effort.
First Direct is offering a 10-year fixed rate of 2.49% at 75% LTV with no fees – their SVR is currently 4.19%. Barclays 10-year fixed for existing borrowers is available at 2.53% at 75% LTV (their SVR is 4.24%) with a £999 product fee, and Virgin Money has a 2.65% rate at 75% LTV with a £1,495 product fee (SVR currently 4.99%).
For borrowers that are concerned about making a move from their lenders SVR to a new product, enlisting the assistance of a broker will help identify the most suitable deal and manage the application process.