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Borrowers pay £15.4 billion in ‘unnecessary’ SVR interest each year

A staggering £15.4 billion of annual interest is being paid by mortgage borrowers sitting on their lenders’ standard variable rate (SVR), according to new analysis from Private Finance.

Data from the Financial Conduct Authority (FCA) indicates 2.04 million UK mortgage borrowers with authorised lenders have been on an SVR for six months or more, amounting to a quarter of all cases.

With a typical loan of £173,677 and an average interest rate of 4.39%, SVR borrowers typically pay £7,546 in annual interest – amounting to a cumulative total of £15.4 billion.

In comparison, a borrower with the same size loan but on a 75% loan-to-value (LTV) two-year fixed rate (1.76%) would pay just £3,012 in annual interest (60% less).

Private Finance’s research also demonstrates that borrowers who remain on an SVR for the full-term risk paying 65% of their original loan in interest. For example, a borrower remaining on a typical SVR for the full 25-year term of their loan would pay £112,683 in total interest, equivalent to 65% of their original loan (£173,677).

The scale of interest relative to the original loan would be similar to short-term, high-cost loans, such as those provided by Wonga. Before it went into administration, the average payday loan of £250 would typically earn Wonga £150 in interest, representing 60% of the original loan. This highlights the comparatively high cost of remaining on an SVR.

“Standard variable rates have always been uncompetitive, but with rates falling fast in recent years, the gulf between SVRs and typical mortgage rates is becoming increasingly apparent,” said Shaun Church, director at Private Finance.

“Lenders are cashing in on borrowers’ inertia, charging rates that are more than two times the rate they would charge to new customers.”

Church added that as so many borrowers end up sitting on an SVR rather than switching, there is a strong market for 10-year fixed products, which require little effort from the borrower but guarantee a long-term competitive rate.

“A lack of flexibility can put some borrowers off these deals, so we would encourage lenders to consider products that allow borrowers to port or end their deal before the fixed period has ended without hefty charges,” he continued.

“However, there is little motivation for lenders to do so given the considerable amount of funding they receive from SVR interest.”

With this, lenders are making significant profit by ‘punishing’ customers for being loyal, Church said, who advised borrowers to not fall into the ‘SVR trap’ and always switch to a more competitive deal once their existing mortgage term comes to an end.

Church finalised: “An independent mortgage broker will be able to advise on the most suitable deal, noting other factors such as product fees and flexibility can be just as important as the headline rate.”

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