Cover feature: Assessing the variables


It may seem a no-brainer to get clients off expensive standard variable rates and on to record-low fixes but not all SVR borrowers are in the same boat

While fixed-rate mort­gages are at all-time lows, nearly four million residential mortgage borrowers are sitting on their lender’s standard variable rate, many of them paying more than 5 per cent interest.

This presents swathes of borrowers – and therefore their brokers – with a huge opportunity to slash mortgage costs.

The potential savings may not be news to brokers but the sheer volume of overpaying borrowers could be eye-opening, leading some commentators to urge intermediaries to contact their clients and save them a lot of cash.

Furthermore, August’s Bank of England base rate cut, from 0.5 per cent to a historic low of 0.25 per cent, brought these massive potential savings into sharp focus.

According to Moneyfacts, the current average SVR is 4.71 per cent, compared to the average two-year fixed rate of 2.44 per cent. Of course, averages do not tell the whole story. The best two-year fixes are around 1 per cent, sometimes lower, smashing SVRs. For example, HSBC has a 0.99 per cent two-year fix at 65 per cent loan-to-value with a £1,499 fee.

On a typical £150,000 repayment mortgage with 20 years left to pay, moving from the average SVR to the HSBC two-year fix would cut monthly costs from £970 to £690, albeit clients would also have to factor in the application and switching fees. Over two years, however, the total savings for many borrowers would be almost £5,000.


Figures from the Council of Mortgage Lenders show vast numbers of borrowers to be on an SVR. Of the 11.1 million UK mortgages, it says at least 2.2 million residential customers are paying the SVR.

In fact the number is likely to be closer to 3.8 million because the CML’s data relates only to regulated mortgages, of which there are 7.7 million. Another 1.8 million are buy-to-let arrangements, with the remaining 1.6 million loans having been advanced before 2004, making them unregulated. As those in the latter group are at least 12 years old, their initial interest rate will have expired, meaning they must be on SVRs.

Mortgage industry figures recommend that clients on a variable-rate mortgage review their deal with the help of a broker.

“With fixed rates at record lows, borrowers could save a substantial amount by swapping their existing SVR to a more competitive deal,” says Legal & General Mortgage Club director Jeremy Duncombe.

Moneyfacts finance expert Charlotte Nelson adds: “Borrowers sitting on their SVR would be better off with a fixed rate.”

Coreco director Andrew Montlake says: “It is time to act. We are close to the point where lenders are loath, or unable, to reduce rates much further.”

Cherry Mortgage & Finance broker Matthew Fleming-Duffy adds: “It is essential consumers track their monthly costs and, when rates are this low, it can make a lot of sense to move away from an SVR.”

In fact rates have never been lower. Moneyfacts figures show the average two-year fixed rate stands at 2.44 per cent, having fallen from 2.48 per cent on 3 August, the day before the cut in Bank base rate. This reduction by 4 basis points is well short of the BoE’s cut of 25bps, proving right many experts who said at the time that, although new-customer rates might fall in the wake of the Bank’s historic move, they could not fall that far.

Furthermore, HSBC’s 0.99 per cent two-year fix was introduced before the base rate cut, showing that top rates have not moved far since then.

Longer-term fixes are also mega-cheap, with the average five-year fix at 3.02 per cent and average 10-year fix at 3.3 per cent, according to Moneyfacts.

The current best buys include Coventry Building Society’s 1.99 per cent five-year fix with no fee, at 50 per cent LTV. Coventry’s 1.99 per cent seven-year fix with a £999 fee at 50 per cent LTV, and its 2.39 per cent 10-year fix with a £999 fee at 50 per cent LTV, also top some best-buy tables.

These rates would have been unthinkable on even two-year fixes a few years ago, let alone on five- or 10-year deals.


Tracker rates have fallen less far but are lower than fixes on average. The typical two-year tracker has fallen to 2.02 per cent from 2.13 per cent at the start of August. Again, this is smaller than the 25bps drop in base rate, representing an increased margin for lenders.


Furthermore, Moneyfacts claims the fall in tracker rates in effect is non-existent given that many lenders had upped their rates in July from the average of 2.01 per cent at the start of the month. Therefore trackers in fact have increased in price since the cut in base rate.

In addition, although trackers on average are cheaper than fixes, this is another red herring because there is nothing as headline grabbing as HSBC’s 0.99 per cent two-year fix.

Nevertheless, the top tracker deals remain attractive, such as Nationwide’s 1.34 per cent with a £999 fee at 60 per cent LTV.

Longer-term trackers also provide greater flexibility, with borrowers often able to make unlimited overpayments without penalty. HSBC offers 1.74 per cent with a £749 fee at 60 per cent LTV for the life of the loan.

Yet average lifetime trackers fell by just 24bps during August, from 2.98 per cent to 2.74 per cent, according to Moneyfacts. Again, this is not significant given the base rate cut of 25bps.

Note of caution

As with new-customer best-buy rates, one must look beyond the average SVR of 4.71 per cent for the full picture on standard rates because there are big differences in lender charges.

At the top among the larger lenders, Leeds Building Society charges SVR customers a massive 5.44 per cent. This compares to 2.25 per cent on some Lloyds, Nationwide and TSB legacy deals. While transferring from the average SVR of 4.71 per cent to HSBC’s 0.99 per cent fix brings savings of £280 a month, a similar switch from Leeds’ eye-watering rate saves £340 a month.

But new deals do not always beat SVRs, esp­ecially at high LTVs. CML spokesman Bernard Clarke adds a note of caution to the calls for customers to switch, saying borrowers should not get carried away by headlines of record-low rates.

He says: “We have a very competitive market. But the most important consideration is that borrowers take out mortgages that fit their needs and remain affordable.”

For example, for a customer on a 2.25 per cent SVR with a £150,000 repayment mortgage and 20 years remaining, the cost is £775 a month. Over two years, assuming no further rate changes, the total is £18,600.

However, although a customer with 65 per cent equity could move to HSBC’s 0.99 per cent two-year fix, for a borrower with only 10 per cent equity the best deal they could obtain would be Nottingham Building Society’s 1.99 per cent fix with a £999 fee.

Nottingham’s deal costs around £760 a month, or £19,240 over two years with the application fee paid in advance, but this excludes switching charges such as exit, legal and valuation fees.

Of course, 1.99 per cent may seem pricey in today’s market but, historically, it is an excellent rate. Montlake says: “Even those with a 10 per cent deposit or equity have seen the cost of rates fall and it seems remarkable that borrowers can obtain a 90 per cent LTV mortgage from 2 per cent.”


SVRs could also be worth sticking with where flexibility is important. Standard rates usually allow unlimited overpayments, unlike most fixes and trackers.

A good example of when it may be best for clients to stick – even if it costs them more in the near term – is where they plan shortly to pay off their mortgage. SPF Private Clients chief executive Mark Harris says: “Brokers will ascertain if it is economical to move borrowers off the SVR. In certain situations it would not be best.”

The choice is not always in clients’ hands due to tough criteria. Some borrowers with patchy credit or limited equity simply will not qualify for the best deals, so may not benefit from switching. However, a good broker can help patch up their credit file with tailored advice.

Fixes are nevertheless in great demand, with 90 per cent of mortgages currently taken being on fixed rates. London & Country associate director of communications David Hollingworth says his firm has received more borrower interest in variable rates since the base rate cut but SVRs remain “the minority share of new lending”.

According to some brokers, however, trackers should not be ruled out. This is especially so if clients trust the experts who predict a further base rate cut this year, with rates then expected to remain low for many more years.

“Trackers can provide an opportunity for payments to fall, subject to there being no collar,” says Harris.

So should more clients be going for a tracker? Hollingworth can see both sides. He says: “Lenders have edged tracker margins up after the base rate cut and fixed rates are so low there is little price advantage in a tracker. The Bank has already suggested it may cut base rate again but, even then, fixed rates hold their own on price.

“I expect many borrowers to continue to lock in at the current low, thus knowing where they    stand from a budgeting perspective. But variable rates have a place and those who feel rates could fall, and stay that way, may prefer one.”

Fleming-Duffy adds: “I do not believe rates will go any lower and paying even a small premium for stable monthly payments makes sense in today’s uncertain financial climate.”

A consideration for clients who want to remortgage is whether they should wait in case rates drop further, given that BoE governor Mark Carney has said the Bank may cut the base rate further later this year.

At the Bank’s rate-setting meeting last month there was no change. However, a survey of 59 UK economists by news agency Reuters in early September found they predicted a cut of 15bps in November, taking rates down to 0.1 per cent.

Yet better-than-expected economic data in the past few weeks has reduced the likelihood of a cut, in some experts’ opinion.

Lender behaviour

Another fall in base rate could mean fixed rates drop further, but there would be no guarantee of lenders lowering new-customer rate in turn – as we have seen already with the minimal  reductions following August’s cut.

The CML has stressed on many occasions that the base rate is not the only factor affecting mortgage rates. In particular, competition has helped push rates down to such a level that there is little margin for lenders to lower them further.

Clarke thinks “it is difficult to see how they can go much lower”, an opinion shared by Fleming-Duffy. However, Harris says there is still room for five-year fixes to fall.

“I expect we will see them closer to 1.5 per cent before the year is out. It all depends on lenders’ hunger,” he says.

A further base rate cut could also make SVRs more attractive, although not all of them necessarily will fall. While most lenders reduced their SVR after the August base rate cut, First Direct and West Bromwich Building Society held theirs, and still have no plans to change them. Their SVR borrowers will no doubt be angered but they are at least paying a relatively low amount.

At 3.69 per cent, First Direct’s SVR is the lowest available from the major lenders – albeit some clients pay 2.25 per cent from legacy deals. Meanwhile, at 3.99 per cent West Brom’s SVR is still among the lowest.

A number of brokers think borrowers on an SVR whose rate is cut may be lulled into a false sense of security, given they could get a far better deal elsewhere.

“Although it’s important lenders cut the SVR after the move by the Bank of England, it is a red herring,” says Hollingworth. “They should be shopping around, which could result in savings of thousands per annum, not hundreds. There is a danger a reduction in payments could result in apathy, so it’s important to consistently get the message across about better rates.”

Borrower inaction

Of course, some homeowners’ inertia, or just a lack of knowledge of the potential savings from escaping an expensive SVR, means they may not take action, especially because the nature of an SVR means borrowers have no natural trigger to seek advice as they do when coming to the end of an introductory deal.


Brokers told Mortgage Strategy it was important for colleagues to employ a combination of email, direct mail and telephone calls to maintain contact with clients – assuming they had consent.

Hollingworth says: “It’s so important to keep in touch with customers, especially those in a position to review their deal.

“If they haven’t reviewed it for some time, it makes sense to remind them about the record-low rates.

“Regular newsletters or emails can raise awareness and social media can be a useful way to communicate that more widely.

“However, you need to be sure you are not cold-calling or breaching financial promotion rules.”