Don't get stuck in the SVR trap
Mortgage borrowers taking advantage of low rates on their lenders’ standard variable rate (SVR) deals have been warned they could end up paying more for their loans down the road.
With the Bank of England base rate at an all-time low of 0.5%, many homeowners have found that their SVR offers a cheaper rate than new fixed and tracker deals currently on the market. While many people with low or negative equity are being forced to sit on SVRs because they can’t remortgage elsewhere, mortgage brokers also report a large number of people are sitting on SVRs in anticipation that new mortgage deals will become cheaper.
Matt Andrews, managing director of Moneyworkout, says 12% of its enquiries in February came from people planning to stay on their SVR even thought they had enough equity to remortgage.
However, while their SVR may be cheaper in the short-term, there are concerns that falling house prices could reduce their opportunities to remortgage.
Currently, lenders continue to reserve their best – and cheapest – deals for people with decent deposits or equity stakes in their property. This means that the best mortgages are only available up to 60% of a property’s value – known as loan to value (LTV). Anyone requiring an LTV of more than 75% will have to pay more, while those needing to borrow more than 80% of their property’s value could struggle to even find a deal.
Andrews says that customers sitting on SVRs have an average equity stake of 24% - so while they should still be able to find a new deal, they are sitting on the cusp of the market.
“With SVRs lower than most new remortgage products it is extremely tempting to stay where you are and enjoy the low rates, comfortable in the thought that you will fix when rates start to increase,” says Andrews. “You must also think about your property value – as house prices fall, the value of your property in relation to your borrowing increases.”
What this means is that as your property value falls, the equity stake you have in it also decreases. The smaller the equity stake you hold, the higher rate you are likely to pay on a mortgage as you move up the LTV bands.
David Hollingworth, mortgage expert at London & Country, is also concerned about the number of people taking a short-sighted approach to their mortgage, by sitting on their SVR. “People are hoping to see cheaper mortgage rates down the line, but personally I don’t think deals will get much cheaper,” he says.
“Even if mortgage rates were to drop a few percentage points, this saving is nothing when compared to the additional price you’ll pay if you fall into a higher LTV band.”
If you are in a position to get a new mortgage deal, then the advice from both Andrews and Hollingworth is to take action now by locking into a new fixed or tracker-rate deal.
“You may have a fantastic SVR now, but look at your LTV, look at property prices in your area and how they are moving - if your mortgage may cross the 80% boundary with the fall in property prices, you may want to consider fixing now, before its too late,” Andrews explains.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.