Helen Nugent

Lenders punish borrowers who slip onto standard variable rates

Lenders punish borrowers who slip onto standard variable rates
Text settings

When you've been writing about money for a while, a few key phrases crop up again and again. But of all the useful words employed in the world of consumer finance, 'shop around' is by far the most popular.

'Make sure to shop around' never goes out of fashion, and for good reason. It applies to pretty much every financial product there is, from bank accounts, saving plans and life cover to car insurance, ISAs and mortgages. It's that last one I want to concentrate on today.

New research from Trussle, an online mortgage broker, has found that the UK's six biggest mortgage lenders are penalising customers who slip onto their Standard Variable Rates (SVR) with a £3,242 hike in annual interest repayments. That's more than a month’s income for the average household.

I read this study with a weary acceptance - twas ever thus. Although I'll admit that the scale of the interest rise was more than I expected.

In its wide-ranging Mortgage Saver Review, Trussle compared average SVRs and two-year-fixed rates from 76 lenders over a six-month period. It found that borrowers with Lloyds, Nationwide, Santander, RBS, Barclays, and HSBC, which collectively serve 69 per cent of the market, would see their monthly interest rate jump by an average of 2.5 per cent when automatically transferred from a leading two-year fixed rate to an SVR at the end of their fixed period.

We know that many of this country's 11.1 million mortgage borrowers do successfully remortgage before being moved to a SVR. But many do not, and there are a number of reasons for this including laziness and a lack of understanding of potential savings. In addition, of the three million households currently on a lender’s SVR, around 1 million are ‘mortgage prisoners’, unable to switch because the introduction of stricter borrowing rules means they fail to meet the criteria for a new mortgage.

However, Trussle says that close to two million people on SVRs could switch immediately. This group constitutes 18 per cent of the mortgage borrowing population, and they are collectively overpaying lenders by £9.8 billion in interest payments every year. So we're not talking small change here.

Going back to the lack of borrower awareness, Trussle's research found that a staggering two thirds of UK mortgage holders don’t know that a lender’s SVR is typically worse value than a fixed rate, while one in four have no idea what ‘SVR’ even stands for. I accept that finance can be baffling but there's really no excuse to be left in the dark, particularly when there's a myriad of online 'how to' guides and multiple glossaries.

Ishaan Malhi, chief executive and founder of Trussle, said: 'The results of this inaugural Mortgage Saver Review highlight the need for the mortgage sector to better educate borrowers and simplify a raft of unfair practices. Borrowers are being put at a huge disadvantage by not understanding the implications of lapsing onto their lender’s Standard Variable Rate. This costs UK homeowners an alarming £10 billion a year in interest payments.

'The industry, its regulators, and the UK government can address these challenges by working together. Potential solutions could be to agree a reasonable upper limit on SVRs, and a system where lenders are not only obliged to warn their mortgage customers well in advance of their fixed rate coming to an end, but also to confirm receipt of this notification.'

Helen Nugent is Online Money Editor of The Spectator