Mortgage misery for 3m households
They’re on punitive standard variable rates ... and have to pay an extra £4billion a year
MORE than three million homeowners are saddled with expensive mortgage deals that are costing an extra £4billion a year.
Record low interest rates have sparked a price war between lenders, with experts describing it as the best time ever to take out a mortgage.
But around 3.2million households – almost a third of the 11.1million with a mortgage – are missing out on the rock bottom rates.
They are stuck on expensive ‘standard variable rate’ mortgages and are being charged £1,272 per year more on average than if they were able switch to a better deal.
This equates to a total of £4.1billion in extra annual payments, according to mortgage broker London & Country.
Last night one expert described this as a ‘ticking time bomb’ and predicted that many of these households will be unable to afford to pay their mortgages if interest rates rise significantly.
Standard variable rates are the
‘These rules are nonsense’
[Families] are paying over the odds ... because they feel they’re stuck with that deal David Hollingworth of mortgage broker London & Country
default loans offered by lenders. Borrowers are automatically flipped onto one of these mortgages when their fixed rate or tracker deal expires.
Experts estimate that a huge number of people stuck on these deals for years are unaware they are paying over the odds.
Others are ‘mortgage prisoners’, who are being blocked from taking out a cheaper deal by both their existing lender or another bank or building society.
Stricter affordability checks introduced in April last year have left more homeowners stranded. The tougher rules have made lenders increasingly reluctant to give home loans to older borrowers and the self- employed or those who have difficulty proving their income.
Borrowers in their forties are also finding it more difficult to get a standard 25-year mortgage because they are unlikely to be in full time work by the time the loan is paid off. Lenders have faced accusations of misinterpreting rules – designed to curb the high-risk lending which contributed to the financial crisis – to trap people on their more expensive default rates.
But Martin Lewis, founder of MoneySavingExpert.com, said: ‘These affordability rules are nonsense and are trapping people on expensive SVRs.
‘People are being rejected for mortgages and told they cannot afford a cheaper mortgage. It’s farcical and is only going to get worse.’
Mr Lewis said the margin between the Bank of England’s base rate and SVRs has gone up from between 1 per cent and 1.5 per cent before the crisis to around 4 per cent.
The base rate has been frozen at a record low of 0.5 per cent since March 2009, but it is expected to start going up gradually from later this year or early next year as the economy continues to improve and inflation starts to rise again.
‘This is a ticking time bomb,’ he said. ‘If interest rates go back up to around 4 per cent then unless the margins come down on SVRs households will be paying 8 per cent. This will lead to massive repossessions and huge arrears.’ Analysis carried out for the Daily Mail by London & Country and financial data firm Moneyfacts found that the average standard variable rate is 4.84 per cent, which equates to a monthly payment of £916 on an average mortgage of £117,000.
This compares with an average two-year fixed-rate deal of 3.04 per cent costing £810 a month. Switching would save £106 per month, or £1,272 a year. If all 3.2million households stuck on expensive SVRs made the switch they would save a total of £4.1billion from their annual mortgage bills.
But the saving could be even bigger. Nat West’s SVR mortgage charges 4 per cent – or £865 a month on a typical mortgage. Its cheapest two-year fixed-rate deal is 1.45 per cent, or £724 per month. This is a difference of £1,692 a year.
David Hollingworth, of London & Country, said: ‘Households are paying over the odds either through apathy or because they feel they’re stuck with that deal.’