Staying vigilant on your mortgage can save you more than just a few pennies. A significant number of British homeowners are falling into a costly trap, shelling out an additional £3,000 on average, simply because they let their mortgage deals expire without renewal. This common oversight pushes their interest rates up to the lender’s higher standard variable rate (SVR), which can make a considerable dent in the household budget.
How Does This Happen?
The process is more common than you might think. When homeowners secure a mortgage, they often benefit from a fixed-rate deal that offers lower interest rates for a set period, typically around three years. During this period, the payments are stable and comparatively affordable. However, at the end of this term, if the homeowner doesn’t take action to renew or find a new deal, the mortgage automatically shifts to the lender’s SVR. This rate is not only higher but is also subject to the lender’s discretion, often resulting in a sudden and significant increase in monthly payments.
According to a study by the personal finance comparison site finder.com, nearly a third of homeowners (31%) have allowed their mortgage to revert to this higher rate for at least a month after their fixed deal ended.
The Real Cost of Inaction
Consider the average UK house price, which currently stands at £281,913. Under a competitive fixed three-year rate of 5.5%, the monthly payment would be approximately £1,361. If, after the initial term, the homeowner doesn’t remortgage, the rate could jump to about 7.5%, pushing the monthly payment up to £1,661. That’s an additional £300 every month. Over ten months, this equates to an extra £3,000 spent on interest alone — money that could have been saved or spent elsewhere.
Moreover, the findings revealed that about 11% of those surveyed had been stuck on a higher revert rate for more than a year, and 3% had been paying this rate for over five years, potentially racking up an additional £30,000 in interest.
Expert Advice
Liz Edwards, a mortgage expert from finder.com, warns of the ease with which many homeowners let these critical renewal dates slip by. She advises, “It’s easy to let renewals slide for a while and even if you remember to renew your mortgage, if you leave it too late then you may need to wait a month or two for the rate on your new deal to kick in. For mortgages, this can have a huge impact on the amount you pay.”
The difference between sticking to a competitive rate and falling back on the SVR can be staggering. For instance, if someone were to pay off a 30-year mortgage using the average revert rate rather than a competitive three-year rate, they could end up paying an additional £180,000 in interest.
Take Action – Set a Reminder!
To avoid falling into this costly scenario, Edwards suggests setting a calendar reminder to start shopping for a new deal well before your fixed-deal expires. This proactive approach not only helps save thousands in potential extra costs but also ensures that your mortgage payments remain as manageable as possible. Remember, when it comes to mortgages, a stitch in time saves nine—or in this case, potentially thousands of pounds. Don’t let inertia cost you money; keep an eye on your mortgage terms and stay ahead of the curve.