Difference between SVRs and fixed rates grows

Difference between SVRs and fixed rates grows
The gap between the best fixed rate mortgage deals and lenders’ standard variable rates (SVR) has widened substantially over the past nine years, according to the Financial Conduct Authority (FCA).

A report by the city watchdog found that customers of the six largest lenders on SVRs make up just 14% of these lenders’ mortgage balances but contribute 30% of their interest income.

The spread between the best two-year fixed rates and SVRs is nearly five times higher today that it was six years ago, having risen from 0.57% to 2.71%. However, the number of borrowers paying the SVR has fallen over time as awareness of the benefits of remortgaging has grown.

Why it’s important to review your mortgage

Homeowners currently languishing on their lender’s SVRs are likely to be paying hundreds, if not thousands of pounds a year more in interest than they need to.

For example, someone with a 25-year £200,000 repayment mortgage would pay £1,140 a month for their mortgage if they were on a typical SVR of 4.75%. However, if they remortgaged to a competitive two-year fixed rate at around 1.50%, their monthly mortgage payments would fall to £800 a month, a saving of £340 a month compared to if they were on the SVR. Over the year, savings would amount to more than £4,000.

Despite the often-substantial savings that can be made, according to our own research at L&C more than 4m households are still on their lender’s SVR.

If you’re one of them, or you’re approaching the end of your current mortgage deal, you should review your options as soon as possible.

Benefits of fixed rates

Locking into a fixed rate deal now while interest rates are still low could offer significant savings as well as protection, particularly as some experts anticipate that we could see a rate rise as soon as August.

Five-year fixed rates can protect homeowners over the longer term, providing valuable peace of mind that monthly payments will remain the same during that period, however high interest rates go.

Before locking into a long-term fixed rate deal it’s important to check for any tie-ins or restrictions and to establish whether the mortgage is portable in case you need to move home during the fixed term.

Seek advice if you’re not sure which deal to choose, and make sure you consider the overall cost of any deal including arrangement fees, rather than focusing on headline rates alone.

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