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New analysis of mortgage rate data by Private Finance reveals borrowers on their lender’s Standard Variable Rate (SVR) could save almost £21,000 in mortgage interest alone over the course of a decade simply by switching to a 10-year fixed deal.
FCA data indicates 2.04 million UK mortgage borrowers with authorised lenders have been on a reversion rate or SVR for six months or more1, amounting to 25% of all mortgage borrowers. The latest data from the Bank of England puts total UK mortgage debt at £1,403bn in Q1 20182. Assuming the 25% of SVR borrowers have the same 25% share of total mortgage debt (giving an average loan of £171,936) this would mean £351bn of mortgage borrowing is being charged at lenders’ SVRs.
The average SVR was 4.1% in July 2018 according to the Bank of England3. An SVR borrower with the typical loan of £171,936 would therefore be paying £587 per month in interest alone and would have made £61,255 in interest payments over a 10-year timeframe. However, if they switched to today’s average 10-year fixed rate (2.76%3), they would pay £192 less in interest each month, making a saving of £20,981 over 10 years. Swapping to today’s best buy 10-year fixed rate (2.39%4) results in even greater savings (£245 monthly or £26,621 over 10 years).
Table 1: Interest payment savings made by switching from an SVR5
Source: Private Finance analysis, 2018
Overpaying could knock 4.5 years off an ex-SVR borrower’s mortgage term
Taking into account both principal and interest payments, a typical SVR borrower on the average rate of 4.1% would pay £917 a month in total, or £275,118 over the full 25-year term. Swapping to the average 10-year fixed deal would reduce this monthly payment to £794, resulting in a £123 saving. If the same borrower was to take this deal but put their savings to use by making additional payments of £123 per month, they would be debt-free 4.5 years sooner than if they didn’t make any overpayments. Borrowers able to qualify for a best buy rate could be free of their mortgage even earlier (five years and four months).
Table 2: Swapping to a new deal and using the savings to make mortgage overpayments leaves borrowers debt-free sooner6
Shaun Church, Director at Private Finance, comments:
“Borrowers lingering on their lender’s SVR will find themselves subject to much higher than average interest rates. When it comes to mortgages, it pays to be proactive, so swapping to a new deal as soon as the initial offer ends is recommended. Our analysis shows the savings from doing so can run into tens of thousands of pounds over the course of a typical mortgage term, making it well worth the effort.
“With the Bank of England recently upping interest rates, many borrowers coming to the end of their current deal will be looking to lock into a fixed rate product. 10-year fixes offer a decade of immunity from future rate rises for a relatively affordable price, as the price gap between shorter and long-term fixes has been narrowing in recent years. Although taking on such a long commitment won’t be for everyone, borrowers looking to ensure financial stability for the foreseeable might well be tempted to switch to a 10-year deal.”
1 FCA Mortgages Market Study, Interim Report, May 2018 – p.46. There are 8.04 million UK borrowers with authorised lenders in total.
2 Mortgage Lenders and Administrators Statistics, Q1 2018 (issued June 2018).
3 Bank of England Quoted Rates, July 2018
4 Best buy identified by Private Finance.
5 Calculated using the Private Finance repayment calculator, based on a loan of £171,936 and a repayment term of 25 years (the most common mortgage term). Savings over the full 25-year term are based on the assumption the borrower switches to an identical rate once their 10-year fixed rate term ends.
6 Calculated using the MoneySavingExpert.com overpayment calculator, based on a loan of £171,936 and a repayment term of 25 years. The results assume the borrower stays on the same rate throughout the 25-year term.
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