Lots of homeowners are facing the prospect of re-mortgaging in the next year, coming off their cheap fixed-rate deals from the past few years and into a market where mortgage rates are far higher. With another rate increase hitting homeowners on 11 May, there’s no doubt that the mortgage market is a scary place to be now. But the worst thing people can do is bury their head in the sand and fall onto their lender’s SVR (standard variable rate) – as those rates have shot up too.

What is an SVR?

An SVR is the default rate that you fall onto when your fixed rate deal ends and you’ve not got a new mortgage deal. It’s the most expensive rate that a mortgage provider will charge and is far higher than any fixed rate or tracker deal on the market.

As the base rate has risen, so too have SVRs. Moneyfacts data shows that in April 2021 the average SVR across all mortgage lenders was 4.41%, and at the time the base rate stood at just 0.1%. But as of April this year, the average SVR was 7.3%, following base rate shooting up to 4.25%. The Bank of England has hiked rates once again, meaning that those SVR figures are likely to climb again.

What impact does that have on borrowing costs?

If you’re on a fixed-rate deal and you then fall onto the SVR, you’ll see a huge increase in the monthly cost of your mortgage. This is accentuated by the fact that lots of people are on mortgage deals where they are paying 2% or less, as they locked in when rates were rock-bottom, meaning the gulf between that fixed rate and current SVRs is huge.

Let’s take someone with a £200,000 mortgage who got a fixed-rate deal two years ago, when the average two-year fix was 3.45% for someone with a 90% loan-to-value. On a 25-year mortgage your repayments would be £996 a month, or just under £12,000 a year. However, if you come off that rate and fall onto the current average SVR of 7.3% you will repay £1,452 a month, which is almost £5,500 a year more in mortgage costs.

The difference is worse if you had a better loan-to-value when you took out your mortgage two years ago, and also if you have higher borrowing. For those with a 60% loan-to-value the average two-year fix in April 2021 was 1.63%, if you move from that rate up to the average SVR now and have a £400,000 mortgage your monthly costs will increase from £1,624 to £2,904 – a whopping £1,280 a month more, or more than £15,000 a year extra.

How do I avoid this?

Put simply: secure a new mortgage deal before yours expires. Some people don’t realise their mortgage fixed rate is coming to an end, or realise too late to get a new deal in time. Others are worried about the rates in the market at the moment and are either burying their head in the sand or planning to wait it out until rates fall.

As the figures above show, even paying one month on the SVR can eat up a big chunk of money. Look up your mortgage documents and check when your fixed-rate deal comes to an end and speak to a broker, if you use one.

You can get ahead of the deal ending too, many mortgage companies will let you secure a new deal six months ahead of your current deal ending. It means you can do the hunting around and paperwork for a new mortgage months ahead of it actually coming into place. This avoids a last-minute dash to secure a new deal, potentially meaning you miss the deadline of your current mortgage ending.

What if I’m trapped with my current provider?

Some people’s circumstances will have changed since they took out their last fixed-rate deal, meaning they can no longer get a new mortgage with a new lender. Maybe the household income has fallen and so you wouldn’t be eligible to borrow the full amount or your house has fallen in value and you no longer have sufficient equity in the property to get a new mortgage deal. It’s a bit trickier for these people.

You should still be able to remortgage with your current lender. It means that you won’t be able to shop around to get the cheapest rate, so you could pay more than with other lenders – but you’ll pay much less than the SVR. Typically, if you stay on the same level of borrowing your lender won’t re-check your details. But this means that if you want to borrow more money you might face more challenges. Your best bet is to talk to a mortgage broker, who will be able to lay out all your options.

‹ Previous2023-05-18Next ›