"Another option that could reduce payments is extending your mortgage term. This means spreading your loan out over a longer period. Doing so can lead to a lower monthly payment, freeing up cash that you can put towards other financial goals"
- Danny Belton - Mortgage Advice Bureau
With nearly 300,000 mortgages up for renewal in Q3 2024, some might be tempted to roll the dice by sticking to a Standard Variable Rate (SVR) in the hope that rates will come down dramatically in the months ahead.
However, homeowners should make sure they fully understand what an SVR entails. Research from Mortgage Advice Bureau found that 27% of prospective buyers have heard of SVRs but don’t fully understand them.
An SVR mortgage is where the interest rate fluctuates based on your lender's own commercial decisions and various other factors, as opposed to being directly linked for example to Bank Base Rate. However, it is also in part influenced by changes in the base rate.
When the base rate decreases, a lender may choose to lower their SVR either partially or in full to reflect the reduction. The SVR doesn’t automatically rise or fall in line with BBR.
Unlike fixed-rate deals, SVRs offer the flexibility to make overpayments without a penalty, potentially saving on interest in the long run. However, there's a catch: SVRs are typically 2% or more expensive than most fixed-rate mortgages. With interest rates currently stuck in neutral, with no clear signal of when they'll finally come down to a meaningfully low level SVRs could expose you to the risk of rates staying high indefinitely.
The goalposts for falling interest rates seem to be perpetually shifting, and those refinancing might be nervous to lock into a fixed rate deal now we are edging closer to a potential Bank of England interest rate cut.
Analysis from Mortgage Advice Bureau shows that the potential costs of remaining on an SVR are significant. Staying on an SVR could mean paying over £24,000 more in interest over a five-year period compared to fixing your mortgage rate. This substantial difference highlights the importance of careful consideration before opting to sit on an SVR, especially given the current economic climate.
Danny Belton, Head of Lending at Mortgage Advice Bureau, highlights some key factors to consider when navigating this uncertainty:
Shorter term fix - reduce your payments in another way
While the flexibility of SVRs can be beneficial, SVRs are renowned for how expensive they are and the risks that they carry. Imagine this: interest rates remain high for an extended time, but you're stuck on your SVR. Not only will your monthly payments increase, but the potential savings from a future drop in rates could completely vanish.
Instead, homeowners might want to consider opting for a shorter fixed-term mortgage. It’s true that the mortgage rate people will be renewing onto is likely going to be a lot higher than their old one, but they’ve also dropped considerably in the last few months. When compared to most SVRs, they’re likely a lot cheaper, providing you with savings and the certainty of what you will be repaying.
For example, if interest rates fall, you'll be free to remortgage to a lower rate as soon as your deal finishes. This allows you to potentially take advantage of future drops in rates, while still enjoying the stability of a fixed rate for a shorter period.
Extend your mortgage term
Another option that could reduce payments is extending your mortgage term. This means spreading your loan out over a longer period. Doing so can lead to a lower monthly payment, freeing up cash that you can put towards other financial goals.
This is particularly helpful if you're nearing the end of a fixed-rate term and are worried about a significant jump in payments. Extending the term helps you maintain a more manageable monthly cost, even with rising interest rates. However, there are things to be aware of.
You’ll likely be paying back a lot more over the length of the mortgage due to the accumulated interest, and for older borrowers, it can be harder to extend a mortgage term. One thing to keep in mind is that a change to the term now doesn’t have to mean it’s set in stone. In a few years’ time, if rates have been reduced, you could reduce the term, and therefore the total interest you would be paying overall.
Don’t bury your head in the sand - speak to a broker
A mortgage adviser will provide impartial advice, assess your financial situation, and recommend the most suitable mortgage option for your needs. They can also explore other options to find the right fit for your goals, such as switching to a new fixed-rate mortgage, including some that allow you to make regular overpayments too, without penalty.
