Homeowners on default mortgage rates hit by £3,500 a year extra costs

Laura Suter
23 January 2019

•        Average standard variable rate costs homeowners £3,500 extra a year
•        Worst offender – Leeds Building Society – costs £5,400 a year more
•        Over a 25-year term these borrowers miss out on a potential savings pot of almost £176,500
•        1.8 million people in the UK on standard variable rate mortgages

Laura Suter, personal finance analyst at investment platform AJ Bell, comments:

“Homeowners stuck on their mortgage company’s default rate are being hit with £3,500 a year in extra costs, thanks to high standard variable rates. Borrowers whose fixed-rate mortgage has ended are automatically rolled onto the default rate, which in some cases is more than three times the rate they were on previously.

“For example, HSBC’s current standard variable rate is 4.19%, compared to its two-year fixed rate of 1.64%, meaning homeowners with a £200,000 loan will pay £3,245 more each year. The worst offender is Leeds Building Society, which offers homeowners 1.62% on a two-year fixed rate but hits them with a 5.69% interest rate when they get pushed onto the standard variable rate – costing almost £5,400 a year more for someone with a £200,000 loan.

“Standard variable rate mortgages move in line with changes in the Bank of England base rate, meaning these homeowners have seen their interest, and so their monthly mortgage repayments, ratchet up as the Bank has increased interest rates.
 
“Homeowners are missing out on a potential savings pot of more than £175,000 thanks to the high rates. Over the 25-year term of the mortgage if you hadn’t handed this money to your mortgage company and had instead invested it, you’d have almost enough to pay your mortgage off again. The £3,521 average annual cost, invested for the 25-year term of the mortgage and earning 5% a year after charges, would leave a pot of almost £176,500.

“The Financial Conduct Authority has recently announced proposals to help the 140,000 ‘mortgage prisoners’ trapped on high rates and unable to move to a cheaper deal due to stricter lending arrangements. But there are still 1.8 million people in the UK on standard variable rates, who are being penalised for their loyalty. Some don’t realise their fixed-rate deal has ended while others haven’t got around to sorting out a new deal, and likely don’t realise how much extra it’s costing them.”

How much extra your standard variable rate costs

Lender

Two-year fixed rate

Standard Variable Rate

Additional monthly cost

Additional annual cost

HSBC

1.64%

4.19%

£270.38

£3,244.56

Leeds Building Society

1.62%

5.69%

£449.56

£5,394.72

Santander

1.74%

4.00%

£239.03

£2,868.36

Nationwide

1.74%

4.24%

£266.26

£3,195.12

Natwest

1.87%

4.24%

£253.40

£3,040.80

Halifax

1.64%

4.24%

£276.08

£3,312.96

Barclays

1.65%

4.24%

£275.10

£3,301.20

TSB

1.69%

4.24%

£271.18

£3,254.16

Clydesdale

1.99%

5.20%

£353.68

£4,244.16

Virgin Money

1.97%

4.99%

£330.69

£3,968.28

Metro Bank

1.99%

4.25%

£242.57

£2,910.84

Average

-

 -

£293.45

£3,521.38

Source: AJ Bell. Notes: Based on the best two-year fix on a £200,000 loan at 80% loan-to-value.

Source: AJ Bell. Notes: Based on the best two-year fix on a £200,000 loan at 80% loan-to-value.

Laura Suter
Personal Finance Analyst
Laura Suter is personal finance analyst at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.
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