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Small mortgage? Sit tight on your SVR

Borrowers with small outstanding mortgage balances may be better sticking with their lender’s standard variable rate rather than switching to a new deal, says expert.

The fees associated with switching to a new fixed-rate mortgage deal mean many borrowers may be better off staying on their existing lender’s standard rate.

Several mortgage lenders have increased their standard variable rates (SVRs) recently, and in some instances these rates are as high as 5.99%, according to financial website Moneynet.co.uk.

However, Andrew Hagger of Moneynet.co.uk, said: “Whilst an SVR touching 6% seems high in the market at the present time, the current rate and fee combinations on fixed-rate deals make sitting on the fence a sensible option for some borrowers.”

He explained that those who bought a property 10 or 15 years ago, when the average house price was around £78,000 or £51,000 respectively, are likely to be in the fortunate position of having a relatively small outstanding balance.

Someone with 10 years left on a mortgage of £40,000, even at a 5.99% SVR, may not have much of an incentive to switch, as the follow table illustrates:

Table courtesy of Moneynet.co.uk

This table shows that the actual savings made by switching, once the fee is taken into account, are very small.

However, for people with a larger amount left to repay, it does make financial sense to switch to a new deal. Switching from a 5.99% SVR mortgage to the Leeds BS deal outlined in the table above, could save someone with a 10-year £70,000 mortgage £1,572 over the five-year term.

Chris Eagle, commercial manager at Creditchoices.co.uk, said: “While some people may be better sticking on their SVR, the potential savings others can make by switching their mortgage are huge.

“If you’re not sure whether you’re on the best deal, we would recommend you contact a whole-of-market mortgage broker to find out how much you could save by switching.”