Millions of mortgage borrowers will ultimately suffer - whatever Bank of England decides on base rate.
April 07 2004
Millions of standard variable rate mortgage borrowers are this week bracing themselves for a widely tipped quarter per cent rise in the Bank of England base rate in the United Kingdom. Taking the base rate to 4.25% would add around £20 a month to repayments for a homeowner with an average £150,000 mortgage.
But whether the MPC gives the green light to an increase or decides to hold off for another month, Peter Barrett of MyMortgageDirect argues that we are now in a rising interest rate environment – and it’s only a matter of time before any borrower paying the standard variable rate will feel the pinch.
"If you are in an SVR arrangement all you are doing is delaying the pain for a few more weeks. Because all the evidence points to rates ending this year significantly higher than they are at present," says Barrett.
Worrying new research undertaken by MyMortgageDirect shows UK mortgage borrowers are overpaying by a phenomenal £2.5 billion a year – purely because they have not bothered to switch from expensive and outmoded standard variable rates to one of the many discounted products now sweeping the market.
Loan Calculator: Variable interest mortgages hurt by rise in Bank rates
"One in two of all the UK’s 11.5 million mortgage accounts are being repaid at a typical SVR of 6.04%, reflecting High Street mortgage lenders’ mark up from the 4% Bank of England base rate," says Barrett.
"And yet the typical homeowner with a £120,000, 25 year mortgage would make an annual saving of just over £1,700* simply by tracking down one of the many loans discounted to 4%and under – they would be mad to stay in an outmoded SVR deal," he points out.
"It is incredible when you think about it," says Barrett. "In most cases, borrowers who are not tied in to their existing deal would save a huge amount of money, often just with a simple phone call.
"Our research has highlighted the typical homeowner with a modest – in today’s terms at least – loan. Yet as we know, if you live in more expensive parts of the country like London and the south east, the average loan size is considerably higher.
"By staying on the standard variable rate – which is basically a dinosaur loan structure far more suited to maximising a lender’s profits than benefiting the borrower – millions of UK homeowners are ensuring that they lose many thousands of pounds over the life of the loan," adds Barrett.
According to the latest figures from the Council of Mortgage Lenders (CML), the UK mortgage market was worth £776 billion at the end of 2003. While there are 11.5 million mortgage accounts, the majority of these are joint accounts and the CML puts the total number of UK mortgage holders at around 20 million.
"It suits lenders to keep existing customers on the artificially high standard variable rate," argues Barrett. "And while most discounts are for a two year period, the days of lengthy tie ins and penalties are behind us if you take advice from MyMortgageDirect.
"We are still in a historically low interest rate environment and those paying much over 4% are basically being taken for a ride: the major lenders should be putting out regular bulletins advising their mortgage customers that much keener rates are available. And matters of course become more urgent as we have moved into a rising interest rate climate," he says.
Editor’s notes on Loan Calculator:
* Assumes a standard variable rate of 6.04% on a £120k mortgage: monthly repayment = £776. The same amount on a 4% discounted rate would reduce the monthly amount by £142 to £634 giving an annual saving of £1,704
** MyMortgageDirect (MMD) is a fast growing telephone and online mortgage advisory service based in East Sussex, offering some of the most competitive deals on the market. Visit www.mymortgagedirect.co.uk
*** MMD founder and mortgage commentator Peter Barrett has had a long career occupying senior positions within the financial services industry. He was formerly managing director (retail) of Bradford & Bingley, which included The MarketPlace and Charcol, two of the UK’s biggest independent financial advisers. Peter was also MD at Goldfish, where he oversaw a company with one million credit card holders. His ambition now is to turn MMD into the UK’s leading and best value mortgage broker. Peter Barrett is available for comment on all mortgage and property related issues. Always controversial, unlike many of the more anodyne UK mortgage commentators worried about upsetting the status quo, Peter tells it as it is. And he has plenty to say.
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