Mortgage Borrowers Pay £15.4bn In Unnecessary SVR Interest Each Year

New analysis by Private Finance reveals a staggering £15.4 billion of annual interest is being paid by mortgage borrowers sitting on their lenders’ standard variable rate (SVR).

  • Borrowers pay £15.4 billion in SVR interest, with typical interest rates of 4% and above
  • Inertia results in borrowers paying an average of £7,500 in mortgage interest a year
  • A borrower who hypothetically sat on an SVR for the full 25-year term would pay interest worth 65% of their original loan, similar to the proportion paid by Wonga loan borrowers (60%)
  • Borrowers could save over £4,500 in annual interest by swapping to a 2-year fix

Financial Conduct Authority (FCA) data indicates 2.04 million UK mortgage borrowers with authorised lenders have been on an SVR for six months or more1, amounting to a quarter (25%) of all mortgage borrowers. With a typical loan of £173,6772 and an average interest rate of 4.39%3, SVR borrowers pay £7,5464 in annual interest – amounting to a cumulative total of £15.4 billion.

In comparison, a borrower with the same size loan but on a 75% loan-to-value (LTV) two-year fixed rate (1.76%) would pay just £3,012 in annual interest, or 60% less.

Table 1:

  Standard variable rate Two-year fixed rate Difference
Average interest rate 4.39% 1.76% 2.63 basis points (bp)
Annual interest payment £7,546 £3,012 £4,534
Total interest paid (25yr term) £112,683 £41,130 £71,553

Annual interest based on first year of interest paid. Total interest paid assumes rate stays the same throughout the term.

Borrowers who remain on an SVR for the full term risk paying 65% of their original loan in interest

Private Finance’s analysis demonstrates that if a borrower was to remain on a typical SVR for the full 25-year term of their loan, they would pay £112,683 in total interest. This represents 65% of their original loan (£173,677). Though this scenario is purely hypothetical, the scale of interest relative to the original loan would be similar to short-term, high-cost loans such as those provided by Wonga. Before it went into administration, the average payday loan of £250 would typically earn Wonga £1505 in interest, representing 60% of the original loan. Though the payday loan and mortgage sectors are very different, this highlights the comparatively high cost of remaining on an SVR.

Shaun Church, Director at Private Finance, comments:

“Standard variable rates have always been uncompetitive, but with rates falling fast in recent years, the gulf between SVRs and typical mortgage rates is becoming increasingly apparent. Lenders are cashing in on borrowers’ inertia, charging rates that are more than two times the rate they would charge to new customers.

“Given so many borrowers end up sitting on an SVR rather than switching, we believe there is a strong market for 10-year fixed products, which require little effort from the borrower but guarantee a long-term competitive rate. A lack of flexibility can put some borrowers off these deals, so we would encourage lenders to consider products that allow borrowers to port or end their deal before the fixed period has ended without hefty charges. However, there is little motivation for lenders to do so given the considerable amount of funding they receive from SVR interest.

“Though it is ultimately the borrower’s choice, lenders are making significant profit by punishing customers for being loyal. The message to borrowers is clear: don’t fall into the SVR trap and always switch to a more competitive deal once your existing mortgage term comes to an end. An independent mortgage broker will be able to advise on the most suitable deal, noting other factors such as product fees and flexibility can be just as important as the headline rate.”

 

1 FCA Mortgages Market Study, Interim Report, May 2018 – p.46. There are 8.04 million UK borrowers with authorised lenders in total.

2 The typical loan is calculated assuming the 2.04 million mortgage borrowers on an SVR (representing 25% of borrowers) have an equal 25% share of the total outstanding value of residential loans (£1.417 billion according to Mortgage Lenders and Administrators Statistics, Q2 2018).  25% of £1.4417 billion / 2.04 million = £173,6772.

3 Bank of England Quoted Rates, October 2018.

4 First year of interest, based on a 25 year mortgage term. Calculated using the Private Finance repayment calculator.

5 BBC News, Why Wonga has run into trouble, 30th August 2018

6 BBC News, Wonga: Where have all the borrowers gone?,30th August 2018

 

Kindly shared by Private Finance