Mortgage holder alert as new figures reveal 370,000 are overpaying – can you save £1,000s/yr? Here's how to check
Hundreds of thousands of homeowners are overpaying on their mortgage because they're languishing on their lender's standard variable rate, new data from the financial regulator has revealed. Yet savings of £1,000s a year may be available if homeowners remortgage to more competitive deals – something they may want to consider sooner rather than later with further interest rate rises expected.
Around 370,000 borrowers could save £1,250 a year over two years, on average, by switching their mortgage, the Financial Conduct Authority (FCA) has estimated in a report published this week.
It specified that around 150,000 of these borrowers would save over £1,000 each year if they switched to a competitive two-year fix, 110,000 could save between £500 and £1,000 each year for that duration, and the remaining 110,000 could save up to £500 a year for the two years.
In addition, a further 150,000 borrowers are nearing the end of their mortgage term and should consider whether it's worth locking in a rate that's available now to use later – another way of avoiding falling onto their lender’s standard variable rate (SVR). The FCA added that it could not access data on an additional 220,000 mortgage borrowers, meaning there could be even more households that can save.
This is particularly pertinent given rising mortgage interest rates. The days of sub-1% fixes are long gone. Today's cheapest fixes are now 2.89% over two years (the only deal available at sub-3%), 3.09% over five years, and 3.33% over 10 years – and rates could go higher still.
See below, as well as our Cheap mortgage finding guide, for full help on your options.
Beware falling onto your lender's standard variable rate
An SVR is the interest rate you start paying once your existing mortgage deal – such as a five-year fix or two-year tracker – comes to an end. The interest rate on an SVR is normally much higher than what you pay on an introductory deal, meaning being on an SVR for any length of time typically results in vastly overpaying on your mortgage.
Right now, a typical SVR costs between 4.5% and 5.5%. SVRs are also variable, meaning that the interest rate can increase at the lender's choosing – something many lenders have been doing as the Bank of England has recently hiked the base rate.
Yet switching mortgage deals if you're on an SVR, either by remortgaging or by product transfer, is penalty free. Even with recent interest rate rises, competitive mortgage deals are still much cheaper than most SVRs.
On your lender's SVR? How to start the process of switching
See our Getting ready to remortgage and Cheap mortgage finding guides for full information on how to start the switching process, but in brief, here's what's involved:
- Dig out the details of your current mortgage. For example, what's the interest rate, what's your monthly repayment, what's the size of your outstanding balance and what's your loan-to-value. If you can't find your paperwork, contact your lender to check.
- Check your existing lender's current deals. Switching with your existing lender is called a 'product transfer'. While it might not have the best deals on the wider market, it's a good benchmark to start with as existing lenders can forgo affordability checks if you're not borrowing more – and there's likely to be less paperwork and fewer fees.
- Scan the cheapest deals across the market. You can get an overview of interest rates and deals out there in two minutes by punching your details into our Mortgage best buys tool.
- Compare what you've found to your current deal. If you're on an expensive SVR, you should find that the new deals you've found will help you save substantially. Our Mortgage calculator can help you work out exactly how big this saving would be.
- Use a mortgage broker to aid acceptance. Lenders do both credit and affordability checks that can scupper applications. It's tough to know which provider will accept you and how much you'll be able to borrow. A good mortgage broker will able to help you with these issues.
Not on an SVR but your mortgage deal is ending soon? Here's what to do
It's always sensible to begin the remortgaging process in advance of your current deal ending, as it'll help you to avoid landing on your lender's SVR. And with interest rates rising rapidly right now – the cheapest deals currently start at 3% compared to 0.8% in October 2021 – it's more important than ever to act quickly.
It's possible to 'lock in' a deal at today's interest rates to start at a future date. Some lenders allow you to lock in up to six months in advance, while most will allow by at least three months. This essentially means you'd protect yourself against any future rate rises. However, if a better deal came along later down the line that you wanted to lock into instead, you may not be able to get a refund on any fees already paid.
More details about what to consider when locking in a deal can be found in our Getting ready to remortgage guide. You can also follow the tips above for help securing the best rate.
Fixed rate mortgage got more than six months left on it? You've a few options
If you've six months or longer to go on your fix, you'll either need to wait for your initial deal term to run out, or pay the early repayment charge (ERC) to leave sooner – though this can set you back £1,000s, in some cases £10,000+, depending on how long you've got left to run on your current deal.
Use our Ditch your mortgage calculator to work out the interest rate you'd need on a new deal to make ditching and paying an ERC worth it. If in doubt, speak with a mortgage broker.
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