Don’t let the base rate cut prevent you saving money

Don’t let the base rate cut prevent you saving money
According to the Council of Mortgage Lenders, 29% of borrowers are currently on their lender’s Standard Variable Rate (SVR), and are no doubt looking forward to lower payments following the Bank of England’s base rate reduction.

One week on, a number of lenders have now announced that they’re passing on the full 0.25% cut, but even those borrowers seeing the benefit may well be able to do substantially better.

Of the lenders who’ve announced SVR reductions, the lowest at the time of writing is HSBC at 3.69% so we can put them on the side of the angels. But that’s not to say their SVR is a good deal – in fact you should take this change as a prompt to see how it compares.

So let’s put that 3.69% rate into a bit of perspective. If you’ve got 40% equity there are many options, both variable and fixed, at least 2% lower. Barclays, for example, has a 2-year tracker with a pay rate of just 1.24%, and a 2-year fixed rate at 1.35%. Both have an arrangement fee of around £1,000 but give free valuation and legal work.

And it would be a mistake to think you need lots of equity to benefit from a cheaper mortgage deal. The cost of loans for higher loan-to-value bands has fallen significantly: even with only 10% equity you could look as low as 2.23% with Tesco’s 2-year fixed rate, or take your pick of high street names under 2.69% - taking 1% or more off HSBC’s rate.

Of course most lenders have substantially higher SVRs so the savings available are even more dramatic. Santander, Virgin and Coventry are also passing on the full 0.25% cut, which will bring their SVRs to around 4.50%, so with 40% equity you could potentially cut your mortgage rate by over 3%. And maybe as much as 2% off your rate with 10% equity.

Then there are the lenders who’ve yet to announce any change, and indeed may not move at all. That includes very big names including Halifax, while many smaller building societies are currently charging 5% or more.

Here’s a quick illustration of what kind of difference that can make, based on a £150,000 loan with 15 years remaining:

  Current Rate
   Potential savings
SVR cut by0.25%New Payment£1,067.91£1,090.09£1,108.78£1,127.66£1,146.72£1,165.97£1,185.41£1,205.03
  2yr saving£443.15£448.58£453.08£457.56£462.01£466.44£470.85£475.23
60% 2yr tracker1.24%New Payment£913.66£913.66£913.66£913.66£913.66£913.66£913.66£913.66
  2yr saving£4,145.05£4,682.80£5,135.88£5,593.43£6,055.45£6,521.89£6,992.74£7,467.98
60% 2yr fix1.35%New Payment£921.02£921.02£921.02£921.02£921.02£921.02£921.02£921.02
  2yr saving£3,968.47£4,506.22£4,959.30£5,416.86£5,878.87£6,345.31£6,816.17£7,291.40
90% 2yr tracker2.50%New Payment£1,000.18£1,000.18£1,000.18£1,000.18£1,000.18£1,000.18£1,000.18£1,000.18
  2yr saving£2,068.57£2,606.32£3,059.39£3,516.95£3,978.96£4,445.41£4,916.26£5,391.49
90% 2yr fix2.69%New Payment£1,013.66£1,013.66£1,013.66£1,013.66£1,013.66£1,013.66£1,013.66£1,013.66
  2yr saving£1,745.25£2,283.00£2,736.08£3,193.64£3,655.65£4,122.09£4,592.95£5,068.18
Based on £150,000 repayment loan with 15 years remaining                  

So many people, even with just 10% equity, could potentially save over £100 per month – perhaps over £200 per month if their lender is at the higher end. Which makes the £20-or-so from an SVR look fairly paltry, if it happens at all.

Of course this is all generalisation and your individual circumstances will dictate what is right for you. 5yr fixed rates, for example, will cost more but give greater stability, while criteria around affordability and interest only loans have tightened since the credit crunch. This is why it’s all the more important to get advice from a qualified mortgage expert.

But no-one should assume that a 0.25% reduction is the best they can hope for. As a starting point check our SVR Watch to see what (if anything) your lender has announced, and compare that to our best buy tables.

Representative example A mortgage of £204,382 payable over 23 years, initially on a fixed rate until 30/09/18 at 2.28% and then on a variable rate of 4.00% for the remaining 21 years would require 26 payments of £951.59 and 250 payments of £1,116.47. The total amount payable would be £304,884 made up of the loan amount plus interest (£99,477) and fees (£1,025). The overall cost for comparison is 3.8% APRC representative.
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