Good time to check you have the best mortgage deal

Hundreds of thousands of homeowners face decision time over their mortgage after the UK’s second biggest lender hiked the cost of loan repayments.

Santander is to raise its standard variable rate (SVR) from 4.24 to 4.74 per cent in October. The change will add £44 a month – £528 a year – to the cost of servicing a £150,000 repayment mortgage with a 25-year term.

It has also increased the maximum amount by which its SVR – the rate borrowers are switched to automatically when their fixed or tracker rate deal ends – can go above the Bank of England base rate.

The rule revision will affect a small minority of borrowers with an SVR cap who had assumed their rate would never go above a certain level. The current margin is 3.75 per cent, giving a maximum SVR of 4.25 per cent, under the 0.5 per cent base rate. The margin is to rise next month to 4.99 per cent, allowing the lender to impose a potential SVR of 5.49 per cent.

The changes will affect borrowers not only with Santander but also those who originally took out their loans with Abbey and Bradford & Bingley, now owned by Santander.

However Alliance & Leicester borrowers already have an SVR of 4.99 per cent and are unaffected by the latest change.

The Spanish-owned bank won’t be the first lender to raise its SVR this year, even though the Bank of England base rate has remained unchanged at 0.5 per cent since March 2009.

The UK’s biggest lender, the Halifax – owned by taxpayer-backed Lloyds Banking Group – increased its SVR from 3.49 to 3.99 per cent earlier this year. Royal Bank of Scotland, Clydesdale Bank and the Co-operative are among other high street lenders to make their SVRs more expensive.

Michael Ossei, personal finance expert at uSwitch.com, said: “This latest increase should serve as a warning that mortgage payments could go up at any time and with very little notice. And although it may be another year or more before the base rate rises, the only way for mortgage rates to go in the long term is up.”

The move comes weeks after a rate war erupted among the big lenders. A series of rate cuts has taken the average cost of a fixed rate mortgage to a new low in recent weeks – at least for borrowers with a healthy chunk of equity in their home.

But it’s no accident that a major lender has increased its standard variable rate at the same time as fixed rate costs are going down.

Millions of borrowers have stayed on their lender’s SVR since the base rate fell to 0.5 per cent more than three years ago – and that’s not necessarily what banks want.

By lowering fixed rates and increasing variable rates, they hope to shift more borrowers onto the former and give their loan book greater certainty.

Robin Purdie, director of MOV8 Financial in Edinburgh, said: “It would appear that lenders are indeed looking for loan-book stability. Several lenders currently offer retention products which are lower than their SVR, some of which have no fees. This is dependent on LTV however.”

So what can you do if you’re on Santander’s SVR? While the hike is a hard one to swallow and the new 4.74 per cent rate will be above the 4.23 per cent market average, several lenders charge as much as 5.99 per cent.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “With interest rates at all-time lows, borrowers have been happy to sit on standard variable rates (SVRs) as these have been low. However, with many lenders now raising SVRs it is worth checking with an independent mortgage broker to see whether you can remortgage on to a cheaper fixed or tracker rate.”

Many borrowers will take the increase as their cue to find a fixed rate mortgage. Fixed rate costs have fallen, but whether you can benefit from that depends on how much equity you have in your home.

Lenders are concentrating their efforts on those with around 40 per cent equity, leaving first-time buyers and homeowners short on deposits or equity with far more expensive repayment rates.

“Santander borrowers with little or no equity will find it tricky to remortgage to another lender so they should speak to their existing lender to see whether there are any fixes or trackers available, or other options, such as extending their mortgage term or payment holidays,” Harris advised.

Purdie agreed that some borrowers will have no alternative but to stay on the SVR and take the hit.

“This will seem harsh to those with no other option, particularly given the Funding for Lending scheme that was recently introduced,” he said.

However there are cheaper fixed rates than 4.74 per cent available, even if you only have 10 per cent equity in your home.

But it’s not all about the rate – some of the best deals come with the highest fees, while there are other costs attached to remortgaging. Once you’ve weighed up the total cost of moving to a new deal, you may decide it’s worth staying where you are, said Harris.

“Reverting to your lender’s SVR means you don’t have to pay a fee and are not tied in with early repayment charges.

“But if you remortgage, you will have to pay your lender an exit fee of as much as £250, plus there may be an arrangement fee to pay the new lender and possibly legal and valuation fees.”

Whatever your circumstances, if you’re on Santander’s SVR the forthcoming increase makes it a good time to check you’re getting the best deal available to you.

“To my mind any borrower who is on a SVR, irrespective of the lender, should be looking to review,” said Purdie. “As we’ve seen already this year, lenders are at liberty to alter their SVR at any time, and it would be wishful thinking to think that Santander will be the last.”

• For further information on Santander’s changes, visit santander.co.uk/mortgages