Money News

Mortgage holders get unexpected £2,600 annual “windfall”

Thursday 27 October, 2011

By Martin Fagan

Borrowers leaving fixed-rate deals for lenders’ SVR find they pay less to the tune of £4.6bn a year, says CML

Around 1.8 million fixed-rate mortgage holders who have reverted to their lender’s standard variable rate (SRV) are paying less than before, says the Council of Mortgage Lenders (CML).

Research by the CML shows these borrowers are paying on average around £2,600 a year less than they were under their previous fixed-rate deal.

Historically, a lender’s SVR has always been higher than its fixedrate and discount deals, but because the SRV moves with the Bank of England’s base rate and the base rate has been at an historic low of 0.5% since March 2009, SRVs have fallen.

In addition, the research found that 967,000 of the 1.8 million borrowers have equity in their homes of at least 10% and 733,000 have a 20% stake, which the CML says puts these households in a strong position to remortgage to an even cheaper deal.

However, the CML says borrowers have become “twitchy” about future direction of interest rates, with many borrowers adopting a "wait and see" approach.

Markets currently expect the base rate to rise from its current 0.5% to around 0.9% by the end of 2012 and 2% by the end of 2014.

Even if that happens, the CML estimates 85% of those borrowers who have reverted to variable rates from a fixed-rate would still be paying less than their original mortgage payment by the end of 2012 and 58% would still pay less than their original payment throughout 2014.

"Most households appear to be able to absorb anticipated interest rate rises over the next few years without seeing the cost of their monthly mortgage payment rise above its original level,” said Paul Smee, director general at the CML.

"The choice of whether or not to fix, and for how long, involves taking a view about the likely direction of future interest rates, along with a personal consideration of how much rate risk is acceptable to a household.

“Given the economic uncertainty, it’s not surprising that, for the time being, many of those who have reverted onto variable rates and could remortgage are choosing to wait before they decide what to do next."

The CML’s' members are banks, building societies and other lenders who together undertake around 94% of all residential mortgage lending in the UK, with 11.3 million outstanding loans worth over £1.2trillion.