2nd June 2017
The UK’s six biggest mortgage lenders are penalising customers who slip onto their Standard Variable Rates (SVR) with a £3,2421 hike in annual interest repayments according to research from online mortgage broker Trussle. The firm says this is more than a month’s income for the average household2.
The research, entitled the Mortgage Saver Review, compares average SVRs and two-year-fixed rates from 76 lenders over a six-month period. It says that borrowers with Lloyds, Nationwide, Santander, RBS, Barclays, and HSBC, which collectively serve 69%3 of the market, would see their monthly interest rate jump by an average of 2.5% when automatically transferred from a leading two-year fixed rate to an SVR at the end of their fixed period.
While most of the UK’s 11.1 million4 mortgage borrowers do successfully remortgage before being moved to a SVR, a vast number fail to do so. Of the three million households currently on a lender’s SVR, around one million5 are ‘mortgage prisoners’, unable to switch, as the introduction of stricter borrowing rules means they’re failing to meet the criteria for a new mortgage. However, close to two million people on SVRs could switch immediately. This group constitutes 18% of the mortgage borrowing population, and they are collectively overpaying lenders by £9.8 billion6 in interest payments every year.
A ‘switching inertia’ crisis
The research 7 found that one of the main reasons so many people languish on SVRs is due to lack of awareness among borrowers. A staggering two thirds (65%) of UK mortgage holders don’t know that a lender’s SVR is typically worse value than a fixed rate, while one in four (24%) have no idea what ‘SVR’ even stands for.
Equally alarming, almost half (48%) of UK mortgage holders don’t know when their fixed rate period comes to an end. Delaying remortgaging by just a month would cost £272.50 for a borrower at one of the UK’s top six lenders.
Another factor contributing to this switching inertia is the negative experience so many people have when securing their first mortgage – which in turn stops people from proactively managing their loan. Two in five (41%) of the borrowers we spoke to in the study recalled the experience of getting their first mortgage negatively and one in ten (8%) even admit to crying during the process.
Ishaan Malhi, CEO and founder of Trussle said: “The results of this inaugural Mortgage Saver Review highlight the need for the mortgage sector to better educate borrowers and simplify a raft of unfair practices. Borrowers are being put at a huge disadvantage by not understanding the implications of lapsing onto their lender’s Standard Variable Rate. This costs UK homeowners an alarming £10 billion a year in interest payments.
“The industry, its regulators, and the UK government can address these challenges by working together. Potential solutions could be to agree a reasonable upper limit on SVRs, and a system where lenders are not only obliged to warn their mortgage customers well in advance of their fixed rate coming to an end, but also to confirm receipt of this notification.”
1 Methodology for the £3,242 figure:
The table below shows the average leading two-year fixed rate and average SVR for the Big Six banks, over a six-month period
|Bank||Market share 2015||SVR||Best 2yr fixed rate|
|Santander UK Plc||11.9%||4.50%||1.31%|
|Royal Bank Of Scotland||11.2%||3.82%||1.32%|
To make the figure representative of the average Big Six mortgage customer, we have accounted for the market share of each by calculating a weighted average for the best two-year fixed and average SVR over six months.
The weighted average two-year fixed came to 1.41% and the weighted average SVR came to 3.91%
These two rates were then applied to an average house price in January 2017 (when mortgage analysis was carried out) of £218,000. Using a 60% LTV, the average mortgage size becomes £130,800.
£130,800 * 1.41% = £1,815.95 interest owed in the first year on average 2-year fixed
£130,800 * 3.91% = £5,058.25 interest owed in the first year on average SVR
£5,058.25 – £1,815.95 = £3,242.3 is the difference in in interest owed between the two.
2 ONS Household disposable income and inequality in the UK: financial year ending 2016: https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2016#main-points
3 CML UK mortgage lenders by gross lending: https://www.cml.org.uk/news/news-and-views/challenger-banks-and-specialist-lenders-showed-strongest-growth/
4 CML UK mortgage key facts: https://www.cml.org.uk/industry-data/key-uk-mortgage-facts/
5 AMI quarterly economic bulletin: http://www.mortgagesolutions.co.uk/your-community/2016/11/09/mortgage-prisoners-still-struggling-marketwatch/
6 Average house price January 2016 was £218,000, assuming 60% LTV means average mortgage value of £130,800. The average SVR in January 2017 was 4.77%, and the best 2 year fixed rate was 0.98% from Yorkshire Building Society. £130,800 at 4.77% = £6,178.73 interest owed in the first year, £130,800 at 0.98% = £1,261.03 interest owed the first year, £6178.73 – £1261.03 = £4,917.7. £4,917.7 x 2 million people = £9.83 billion
7 OnePoll nationally representative survey of 2,000 UK mortgage borrowers carried out in April 2017