Recent research has shown that the average monthly cost of a variable rate mortgage, in comparison to the more commonly utilised fixed rate mortgage, has increased by 13.3% and is only likely to increase as rates jump up and up.
What Is A Variable Rate Mortgage?
A variable rate mortgage is a mortgage that doesn’t have a fixed interest rate. That means that your mortgage payments could go up or down and won’t stay at the same level. Unlike a fixed rate mortgage where you can fix the interest rates at either 2, 3, 5, or 10 years depending on your choice and the advice provided by your mortgage advisor.
It’s fair to say that most people choose to fix their mortgage as it often gives a level of certainty to people. If you fix your mortgage rate for a few years, you will have comfort in the knowledge that your interest rate and your monthly payments won’t go up at all for that fixed period. then, when your fixed period ends, you can look at moving onto another fixed deal.
Variable rates are determined almost entirely by a rate set by the bank (SVR rate) this is often higher than the rates of other product that the offer under fixed conditions. This rate is not directly affected by the Bank of England’s changes to the base rate necessarily, however most lenders will increase or decrease their SVR as a result of changes to the base rate, but they don’t have to like in the case of tracker mortgages.
With an SVR mortgage, your payments can change at any time at the will of the mortgage lender.
What Has Changed
In recent years, although higher than the offered fixed rates with lenders, SVR products have generally been between 3% and 5%. As mortgage advisors, we have always encouraged borrowers coming to the end of their fixed product, to avoid automatically falling onto the SVR and to fix a new product as soon as possible.
However, as rates have risen across the board for all mortgage products, the gap between fixed products and the SVR has narrowed somewhat and things like tracker mortgages (which are similar to the SVR) have become a more enticing option for a lot of people. Now, the average interest rate for a mortgage is around 5-6% with some lenders getting closer to 7%. If look at Santander’s SVR right now, they have set their standard variable rate at 6.24%.
But, despite this, the data still shows that fixing your mortgage and avoiding the SVR is still more beneficial for borrowers. Finance brokers revolution have carried out some interesting research into the cost of SVR mortgages and have revealed that despite adjustments for inflation, the monthly cost of an SVR product has increased by 13.3%.
They have specifically pointed out one example from their research:
The research shows that in October 2021, the average homebuyer with a standard variable rate mortgage, on the average UK house price of £260,575 and at a rate of 3.61%, was repaying £990 per month. But in October 2022, after adjusting for inflation, the monthly repayment cost came to a shocking £1,093.
In comparison to today, the average house price has risen to £292,118, and the average mortgage rate for a variable rate product at a 75% LTV now sits at 4.89%. As a result, the average homebuyer is facing a repayment of £1,267 per month if they are on an SVR. This is £149 (13.3%) per month higher than in January of 2022 and £174 (15.9%) more than the cost of a monthly repayment in October 2021.
Director of Revolution Almas Uddin, commenting on the research carried out by his firm said:
“The average rate for a variable rate mortgage has climbed by over 1.2% since the start of this year alone and this is really only the tip of the iceberg with respect to increasing mortgage rates. So, while those who purchased with a variable rate mortgage at the start of the year may have only seen a marginal increase in their monthly repayments so far, they can certainly expect further hikes over the coming months.
As it stands, rates remain fairly favourable and so now is the time to consider remortgaging if you’re in a position to do so, with a fixed rate product providing some protection over the impending escalating cost of borrowing.”
We couldn’t agree more Almas!
If you or anyone you know is worried that you are coming to the end of your fixed product and might end up falling on the lender’s SVR, give our advisors a call today to see how we can get you back on track. We are here to help!
