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When mortgage deals end, borrowers get switched to their lender's standard variable rate (SVR). While there have been times in the past when this SVR was lower than the fixed rates that were due to end – meaning people's monthly repayment amounts went down – this month sees the highest difference since March 2008, with the average SVR much higher than the average fixed rate offered on two-year deals two years ago.
This is bad news for anyone considering not remortgaging after their current deal ends, as it means their monthly mortgage payments are likely to increase significantly. Of course, as Moneyfacts finance expert Charlotte Nelson pointed out, much of this is due to "the recent base rate increase", which "has seen the average SVR rise from 4.72% in August to 4.85% in September."
"Borrowers coming to the end of a two-year fixed rate today will have the biggest incentive to switch in 10 years, with the difference between the average two-year fixed mortgage rate of two years ago (2.44%) and the current average SVR reaching 2.41%," Charlotte said. The below figure, taken from the upcoming Moneyfacts UK Mortgage Trends Treasury Report, illustrates this discrepancy, showing a timeline of when the average interest rate increased or decreased when reverting to an SVR on maturity of a two-year fixed rate mortgage.
Average difference between the two-year fixed rate and SVR
Source: Moneyfacts UK Mortgage Trends Treasury Reports
"This shows the significant impact the 0.25% jump in base rate has had on the mortgage market," Charlotte commented. In contrast, "a year ago, when the variance stood at 1.88%, borrowers reaching the end of their fixed deal would perhaps not have reacted as quickly when approaching an SVR."
Given that monthly repayments could increase by £260.57 per month (based on the average rates and a £200,000 mortgage over a 25-year term on a capital and interest repayment basis) if someone opted to simply revert to the SVR, it's easy to see why remortgaging is likely to be beneficial. The question then becomes, what to remortgage to?
Looking at the mortgage charts, and bearing in mind there may be more base rate increases to come, it's still a good idea to consider a fixed rate mortgage. Indeed, according to Charlotte "it is likely that many savvy borrowers pre-empted the base rate rise and have already remortgaged to another fixed deal, which in turn has boosted remortgage activity, with the number of remortgage advances in June 2018 growing 8.4% year-on-year [based on UK Finance's latest Mortgage Trends Update]."
With borrowers likely to have even more motivation to remortgage after looking at the above graphic, providers will need to stay on their toes if they don't want to lose customers. "However, as it is becoming increasingly difficult for lenders to lower rates, they may look at other aspects of the mortgage package to attract remortgaging customers, such as fees and incentives," Charlotte said.
This means it may be a good idea to not just keep an eye at the mortgage Best Buys, but also to look at what fees and other incentives are on offer before you pick a deal to remortgage to. As always, Charlotte does warn borrowers that "they must consider all aspects of the mortgage to ensure they are getting the best deal for them."
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