Wednesday, 14 September 2011

The sneaky mortgage rate that may cost you

In the old days lenders had one standard variable rate each. But not any more. So which one will you have to pay?Standard variable rates (or SVRs) used to be simple. The SVR is a mortgage lender's basic lending rate. Typically the SVR is the rate a borrower moves to when a fixed or other tied-in deal comes to an end.

And although lenders can set the SVR at any level they choose and change it whenever the mood takes them, the rate generally moves in line with the Bank of England base rate.

Historically, paying the SVR meant you were paying a higher-than-necessary rate for your mortgage, but since the base rate fell to 0.5% more than two-and-a-half years ago, the SVR can be a competitive rate in many cases.

However, some mortgage lenders are baffling borrowers by having more than one SVR; typically one for existing borrowers and one for new customers.

New vs existing borrowers
Nationwide Building Society introduced a two-tier SVR system back in April 2009. Up until then it had a guarantee in place that promised its 'base mortgage rate' (BMR) would never be more than 2% above the base rate. When the base rate fell to 0.5% in March 2009 borrowers on Nationwide's BMR paid just 2.5% interest and have been on to a winner ever since as the base rate stayed put.

But borrowers who took out a mortgage with the building society after April 2009 have not been so lucky. When their deals end they're moved to Nationwide's standard variable rate, which doesn't come with any promises and is currently 3.99%.

For a borrower with a mortgage of £150,000 this would mean repayments would be about £118 more each month than if Nationwide still offered the BMR of 2.5%.

Nationwide justifies the two-tier system by saying it needs to balance the needs of both savers and borrowers; if it doesn't rake in cash from mortgage borrowers then it can't offer decent savings rates.

Lloyds has a similar two-tier system. Up until June 2010 the bank promised that the SVR would never be more than 2% above base. So existing customers who took out mortgages before that could revert to an SVR of 2.5% if the base rate stayed at 0.5%.

But since June last year the go-to rate at the end of a fixed or other tied-in deal changed to the 'Homeowner Variable Rate', which currently stands at 3.99% and doesn't come with any promises.

To make things more complicated still, Lloyds also has a 'Buy-To-Let Variable Rate', which currently stands at 4.84%, almost double Lloyds' cheapest SVR. Again, this came into effect in June 2010 - landlords with mortgages taken out before this date can still revert to the SVR of 2.5%.

Clydesdale Bank also has a different go-to rate for residential customers and buy-to-let customers. Residential deals revert to a variable rate which currently stands at 4.49% but buy-to-let borrowers pay 0.5% more at 4.99%.

Nottingham Building Society has different variable rates for landlords too. Most mainstream deals revert to the building society's variable mortgage rate of 6.14% - the highest on the market - while buy-to-let borrowers pay a hefty 6.54% on the buy-to-let variable mortgage rate.

Should you pay the SVR?
The average SVR currently stands at 4.8%, considerably higher than the best buy mortgage deals available at the moment. So should you switch if you're paying your lender's SVR?

In most cases switching away from a SVR will be penalty-free. If you do have to pay early redemption charges, these are likely to wipe out any savings you make.

As a general rule anyone paying a SVR of 3.5% or over will benefit from switching mortgages but they'll need at least 15% equity in their home to be eligible for the most competitive mortgages available.

Borrowers on an SVR of 2.5% with Nationwide or Lloyds should stay put until a rate rise looks imminent, which might not be until 2014 according to some pundits.

When switching it's important to take any arrangement fees into account when working out the total cost of a new mortgage compared to your current deal.

No comments:

Post a Comment