Laziness and lack of financial literacy? Why are so many people sat on their mortgage lenders standard variable rate?

As mortgage brokers, our collective mind boggles when we see customers pouring money down the drain each month sat on a lenders standard variable rate, yet a study by Experian (1) in September 2020 showed that 46% of homeowners were on their lenders standard variable rate.

Consumer group Which (2) released and article in January 2021 saying that ‘Homeowners could be paying more than ￡4,000 too much in mortgage repayments every year, after lapsing on to their lender’s standard variable rate (SVR).’

Heck, even at Peak, we have some clients who’s arms we have to twist to let us look at their other mortgages properly. We genuinely had a customer this week who was happy to drop onto his standard variable rate until we pointed our that this would add ￡879.58 A MONTH to his repayments compared to doing nothing. When real numbers were put in front of him, he bit our hand off!

It’s fairly unlikely that the average UK homeowner has ￡4000 a year to waste (imagine the look on your partners face if you came in and said you’d lost that sort of sum in a casino!) so why do so nearly half of UK mortgage holders continue to sit on their SVR when clearly, it is often a very financially silly thing to do?

Ok in some rare cases sitting on SVR can have perceived advantages so let’s address them before completely going to town.

Being on a standard variable rate normally means you can overpay as much extra off of your mortgage as you like without being hit with any early repayment charges. That’s a very valid point however, there are many often lower rates out there offered by lenders that clients may be eligible for, meaning they can still overpay but not get stitched up financially by their existing lender charging an over the odds interest rate whilst they do it.

Some customers may also have had a change in their circumstances meaning that they aren’t in the position to apply for a new mortgage with a new lender. Often this can be worked around. A good broker can also explore the possibility of a ‘rate switch’ or ‘product transfer’ with a clients existing lender meaning they don’t need to go through the normal process of verifying income, credit scoring etc but aren’t potentially getting ripped off every month.

Where you might legitimately sit on a standard variable rate for a short period is if you currently have a house sale/purchase going through and would rather take the hit of higher interest for a month or 2 so as to have no tie ins and free choice of lender for your onward purchase without the hassle of applying for 2 mortgages. Really that’s about the only common legitimate reason and those clients if they are savvy are already speaking to a mortgage broker who is looking after their needs and would be advising on the suitability of that course of action.

My experience as a broker though is that we have a bit of a perfect storm where laziness and lack of financial literacy means a large proportion of people legitimately struggle to get their heads round what a huge difference a simple course of action could mean to their household finances. They don't appreciate the potential advantages of doing something, or don't really understand the process.

Just imagine the hoops many of us would jump through to get a ￡4K (after tax) payrise if we use the average annual saving according to Which. Obviously something is stopping consumers so I’ll address some of the common hurdles, real or imagined that seem to crop up.

Consumers think it costs money to remortgage. This doesn't have to be the case as there are generally plenty of fee free options out there for remortgages and most of the commonly used lenders either provide a free solicitor to do the very basic legal work needed or provide cashback for you to put towards paying for your own. Sometimes paying a fee can be worthwhile (I just paid a ￡995 fee to my lender get a better rate on my remortgage as it saved me around ￡1400 in interest over the next 2 years) but a mortgage broker will always factor in your personal preference as well as work out what actually leaves a client better off financially.

Also here at Peak, we do not charge a broker fee for any remortgage business that we submit so our mortgage advice and guidance will cost a customer nothing – not bad for a company with over 300 5 star Google Reviews (3) - the most in Derbyshire. Complimentary beer in our office also means that even if you just pop into the office and don’t proceed with anything, you’ve had a free drink on us!

People think it’s inconvenient. Well it shouldn’t be. A good broker will see you at a time that’s convenient for you and take care of all the hard work, guiding you through. Yes you’ll have to spend 5 minutes maybe getting a few bank statements and payslips together as well as signing a few documents. It’s perhaps a 2 hour outlay of time every couple of years to not be paying an average of ￡4000 a year extra in interest? I can’t think of many legal ways to earn that much in a few hours so therefore it should be towards the top of our list of financial priorities as consumers.

Many people think that remortgaging means adding more debt to your property. Often quite the opposite is true! Remortgaging involves switching your current one to as good a deal as possible meaning you ideally pay less interest in the long run and could actually afford to pay off your debt quicker.

Very often when we are bringing a clients rate down we encourage them to reduce their mortgage term whilst keeping the payment the same – this can mean they have to pay the lender a lot less interest in the long run as well as reaching the promised land of being debt free sooner.

And every brokers favourite – “My bank probably offers me the best deal.” In short, probably not. There are thousands upon thousands of mortgage deals out there at any one time. The odds that your bank offers ‘the best’ are frankly pretty long and even if they do, more often than not your mortgage broker will likely have access to that rate anyway, as well as offering a bit more of a personable and user friendly process.

A good broker will do all the heavy lifting even after the mortgage offer is issued, like liaising with solicitors and checking the paperwork is all in order. Direct to your bank you’ll get your offer but then often they leave you to muddle through on your own.

Really we can see there are very few situations (bar selling your house and redeeming a mortgage imminently) where sitting on a standard variable rate is likely to be anything less than financially a little bit silly. The potential savings are too large to ignore and the smokescreen reasons to put it off are often not valid. It comes down then to financial literacy, nor appreciating the potential savings or else laziness and real life events meaning it keeps dropping to the bottom of our to-do lists.

Go on Google, search for mortgage brokers in your town, and get in touch with whoever has the best reviews. They will help take it from there. Or just call us here at Peak – it’s for good reason that we have over 300 5 star Google Reviews and whilst our preference is to conduct business face to face over a beer, we can video call anyone, anywhere in the UK. Don’t forget, we do not charge a broker fee or advice fee on a residential remortgage so it will cost you nothing to speak to us and you could end up significantly better off.

So, if you are on a standard variable rate without good reason, your next call, text or email needs to be to a mortgage broker. Your next should be to anyone you know in the same boat.

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(1)??https://www.experianplc.com/media/news/2020/millions-of-homeowners-still-missing-out-on-mortgage-savings-of-up-to-5-000/

(2)??https://www.which.co.uk/news/2021/01/six-remortgaging-myths-that-could-cost-you-thousands/ - Which?

(3)??As of 03/08/21 292 reviews on https://www.google.com/search?q=peak+mortgages+and+protection&rlz=1C1CHBF_en-GBGB852GB852&oq=peak+mortgages+and+protection&aqs=chrome..69i57j46i39i175i199j0i22i30j69i61j69i60l2j69i65l2.5594j0j4&sourceid=chrome&ie=UTF-8 and 43 on https://www.google.com/search?q=peak+mortgages+and+protection+swadlincote&rlz=1C1CHBF_en-GBGB852GB852&sxsrf=ALeKk02zU2TA9Cv-peRzxKqTzyOmBo0EOA%3A1627995552035&ei=oD0JYcHEAczSkwWKmJbwCQ&oq=peak+mortgages+and+protection+swadlincote&gs_lcp=Cgdnd3Mtd2l6EAM6BwgAEEcQsAM6CAghEBYQHRAeSgQIQRgAUIUkWLYrYLMuaAFwAngAgAFZiAGgBJIBATeYAQCgAQHIAQTAAQE&sclient=gws-wiz&ved=0ahUKEwjBlMyE9JTyAhVM6aQKHQqMBZ4Q4dUDCA4&uact=5