Variable rates are back in favour

BORROWERS at the end of their existing deals are increasingly opting for their lender’s standard variable rate (SVR) to avoid high mortgage costs. The number of mortgages available has tumbled dramatically in the past year and the most competitive fixed rates are open only to borrowers with a sizeable chunk of equity in their home.

However, while the cost of fixed rate mortgages has soared, SVRs, traditionally the expensive last-resort option, have remained in line with the Bank of England base rate (cut three times in the past year) and the difference between the two is narrower than at any point in recent history.

While fixed rates have fallen in recent weeks – to an average 6.90 per cent from an early July average of 7.08 per cent – the best rates are still available only to borrowers with a good amount of equity in their home. Even fixed rates for borrowers with a 25 per cent deposit have risen, from 5.74 per cent in February to 6.6 per cent in June.

In contrast, the average SVR has fallen from an average of 7.74 per cent last October to 7.01 per cent (as of 4 August). The absence of penalties for switching away from an SVR or costs for moving on to one are an added attraction.

“Normally you would encourage borrowers to shop around at the end of their deal and avoid going on to the SVR. But that’s not so easy now,” said Louise Cuming, head of mortgages at moneysupermarket.com. “Lenders have changed their criteria so you can’t borrow at the same multiples as before, so borrowers need to consider SVRs even if they’re not effectively trapped into them.”

Fees and charges levied on fixed rates have also risen significantly in recent months as lenders have become more selective about who they do business with, adding to the attraction of SVRs. Arrangement fees currently average around £600, although some are up to 3 per cent of the mortgage.

“Whenever it comes to remortgaging, compare the cost of the fixed rate, including any fees, against what you would pay with an SVR over the same length of time,” advised John Postlethwaite, mortgage expert at Punter Southall Financial Management in Edinburgh.

The lack of early-redemption charges on SVRs, plus their relatively competitive rates, has encouraged some borrowers to move on to them while they wait for fixed rates to improve.

Indeed, borrowers are most likely to opt for an SVR if they believe fixed rates will come down soon and want the flexibility to take advantage when they do; those who have nearly paid off their mortgage; borrowers set to move house and those given no choice by the increasingly risk-averse attitude of lenders.

The subsequent increase in demand has created an unprecedented situation where new borrower applications for SVRs are being turned down by lenders.

“I have been recommending that clients consider SVRs so they can move to a more competitive product when the market changes, but some lenders are now saying they won’t accept new SVR business,” said Robert Annand, an IFA at Pagan Osborne is Edinburgh.

“I’ve never experienced this scenario before, we’ve never had a case of borrowers being turned away from SVRs.”

Among the lenders to have taken this unusual move are Skipton Building Society, Halifax and Cheltenham & Gloucester, while others, including Nationwide, have stopped offering SVRs through intermediaries.

For existing borrowers, whether you remortgage or switch to your lender’s SVR will in many cases be dictated by how competitive that SVR is. At the time of writing, the lowest SVR was from First Direct, at 6 per cent, while Kent Reliance offered the highest, at 7.59 per cent, followed by Northern Rock with 7.49 per cent.

In some cases, trackers are another alternative to fixed rates for borrowers happy to tie in for at least two or three years. “They look good value, especially for those who want to make large overpayments,” said Postlethwaite. “While there’s a penalty for leaving early, most trackers allow unlimited overpayments.”

However, Annand said there was little advantage to be taken from opting for trackers. “At the moment, there’s not a big difference between trackers and fixed rates, whereas two years ago trackers were very competitive in comparison.”

As with all mortgage products in the present market, the value of the deals available when it comes to remortgaging will depend on the amount of equity you have in your home.

While borrowers with at least 25 per cent equity in their home have access to the best rates, the closer your loan-to-value ratio gets to 100 per cent, the more persuasive becomes the argument for SVRs.

Top tips: IF YOU are remortgaging, you can improve your chances of finding a good deal:


||98|| Talk to your existing lender first: standard variable rates are increasingly competitive relative to fixed rates.

||76|| Improve your credit rating: borrowers presenting the least risk get the best deals, so check your credit rating.

||54|| Look at the big picture: take all fees and charges into consideration. In some cases, high arrangement fees are attached to the best deals and could be worth paying.

4 Increase your equity: if you can cut your loan-to-value to 75 per cent or lower you’ll have access to more competitive rates.

5 Long-term: deals that tie you in for five years or more are increasingly competitive relative to two-year fixes.