A third of homeowners fail to line up a new mortgage deal before their existing one expires - and it proves an expensive mistake.
Homeowners are collectively wasting £53.3m a year by failing to remortgage before their current deal expires.
A third of people whose fixed rate or tracker mortgage ended in 2017 ended up on their lender’s standard variable rate (SVR) for an average of six weeks.
Their failure to line up a new mortgage before their existing one expired cost them an average of £371 or £61.83 per week, according to Dynamo, part of mortgage broker Countrywide.
Why is this happening?
When fixed term mortgages come to an end, homeowners are automatically put on to their lender’s SVR, also known as a reversion rate.
The interest charged on SVRs is typically significantly higher than the rates available on new deals, meaning people end up paying over the odds for their home loan until they switch to a new mortgage.
While it is not known exactly why homeowners are sitting on an SVR for an average of 42 days, it is likely to be because they have failed to realise their mortgage term is coming to an end or have not left enough time to switch to a new deal before it expires.
Who does it affect?
Homeowners should start thinking about a new mortgage three to four months before their current deal expires.
The remortgage process typically takes between four and eight weeks. It is usually quicker if people are taking out a new mortgage with their current lender, while things tend to take longer if they are moving to a new bank or building society.
New mortgage affordability rules were introduced in April 2014, so homeowners coming off five-year fixed rate deals may find the application process tougher than when they last applied.
The good news is that most banks and building societies will allow you to secure a new mortgage three months before your existing one expires, enabling people to start the remortgage process well before their current deal ends.
What’s the background?
Nine out of 10 people who took out a mortgage in 2017 opted for a fixed rate deal, according to the Dynamo research.
Fixed rate mortgages give borrowers the security of knowing exactly what their monthly repayments will be, and they tend to be particularly popular in periods, such as the current one, when interest rates are rising.
But variable rate deals, such as tracker mortgages, have advantages too. They often offering lower rates than fixed rate deals (where you pay a premium for peace of mind), and can prove cheaper if interest rates stay low.
When shopping around for a new deal, it is important to compare the overall cost of the mortgage, factoring in any arrangement fees.
The best value loan will often be different for different people, depending on the size of their mortgage.
For example, the AA has one two-year fixed rate mortgage at 1.49% that comes with a £1,495 arrangement fee and one two-year fix at 1.89% with no fee.
A homeowner with a £100,000 mortgage would only save £20 a month, or £480 over the two-year term, if they opted for the lower rate, meaning the savings would not offset the fee.
By contrast, someone borrowing £500,000 would be £100 a month or £2,400 over two years better off if they paid the fee to secure the lower rate.
Are you looking to remortgage? Find a new deal before your current one expires by comparing the best rates with our partners, uSwitch.
Top 3 takeaways
- Homeowners are collectively wasting £53.3m a year by failing to remortgage before their current deal expires
- A third of people whose fixed rate or tracker mortgage ended in 2017 ended up on their lender’s standard variable rate for an average of six weeks
- Their failure to line up a new mortgage before their existing one expired cost homeowners an average of £371