Legal & General Mortgage Club has found that swapping existing mortgages from the Standard Variable Rate (SVR) to a more competitive product could save the average homeowner over £2,000 a year.
Homeowners on a competitive two-year fixed rate deal currently available on the market could save £171.85 a month, or £2,062.20 over a year, compared to borrowers who remain on a lender’s SVR. With 1.9m homeowners currently caught on their lenders variable rate (one in six mortgage borrowers), the mortgage club said a “huge portion” of the UK could save a substantial amount of money simply by searching the market for alternative offers.
For homeowners on SVRs across the UK, this equates to £3.9bn (£3,918,180,000) a year.
Research from Legal & General Mortgage Club, however, has found that when presented with financial decisions such as this, borrowers can react in many different ways. These differing attitudes could ultimately have severe impacts on a consumer’s finances in the mid-long term. Calculations from Legal & General Mortgage Club, below, show just how big an impact small changes can have:
1: The continually complacent
Despite speculation of a rate rise looming, and warnings that headline low rates won’t be around forever, these borrowers stick with their current lender’s SVR. They are satisfied with their deal, and do not anticipate an interest rate rise impacting their monthly payments of £792.75. However, by not reviewing their deal, they risk paying an extra £681.72 per year every time the SVR increases by 0.5%.
2: The flexible financer
Listening to a mortgage broker’s advice, these borrowers rethink their current deal – their lender’s SVR of 4.74%. As a result, they switch to a two-year fix from a high street lender. This has a rate of 1.69% and a fee of £999. Despite the initial cost, their monthly interest payment is reduced to £629.74, saving them £221.20 each month and £5,308.80 over the fixed rate term.
3: The reluctant reviewer
Currently on an SVR from their lender, these borrowers are likely to wait until 2017 before deciding to shop around. By then, banks may well be pricing higher rates into their products. Whilst they have saved money by eventually switching from an SVR, they do not save as much as those borrowers who acted earlier. If their lender’s SVR were to increase by 0.5% before late 2017, this borrower would only reduce their monthly payments by £183.89 a month and £4,413.36 over the fixed term.
Jeremy Duncombe, director of Legal & General Mortgage Club, said: “Today’s borrowers today are missing out on some great opportunities to save, mainly due to complacency. Simply switching deals to a more competitive rate could make a significant difference to their everyday life, particularly at a time when wage growth is relatively low.
“Now is the perfect time to review current deals, especially for those on an SVR or coming to the end of a mortgage term. Homeowners should contact an adviser to explore the idea of swapping to a different mortgage deal, which could give them the equivalent of a hefty pay rise. Those who act now may see significant benefits in the years to come, as they’ll able to take advantage of current interest rates while they are still at an all-time low.”