Published in Mortgages on 20 November 2008

The Bank of England’s dramatic 1.5% cut to the base rate has made some standard variable rate mortgages cheaper, but are you going to benefit?

Standard variable rate (SVR) mortgages have been a huge no-no for borrowers for as long as I can remember.

That’s because in normal times, you’re much better off borrowing on a mortgage ‘deal.’ So when you first take out a mortgage, you might sign up for a three year introductory deal where you’re paying a better rate than the SVR. Then when the three year period is up, you switch to another special rate deal and avoid the dreaded SVR.

But all that has changed because, bizarrely, the banking crisis has now forced lenders to price SVRs so competitively that some are now among the best mortgages on the market.

As you know, the Bank of England cut the base rate by a bold 1.5% earlier this month. Since then, the government has put serious pressure on the largest lenders to pass on the cut to borrowers. And suddenly lots of SVRs are attractive.

Most of the big mortgage lenders have indeed chosen to pass on the rate cut, reducing the SVR by the full 1.5%. But, interestingly, Barclays and HSBC — both of which turned down help from the government’s £37 billion bank bail-out — are yet to apply a similar cut. Although HSBC will be reducing the SVR to 5.44% from 5 December.

Nationwide is currently offering the most competitive rate on the market at 4.69%. A borrower with a £150,000 mortgage (over 25 years) would pay just £850 a month.

But, don’t forget, SVRs haven’t reduced across the board. If your mortgage deal is almost up, don’t make the mistake of assuming your lender’s SVR is necessarily a good bet.

At the other end of the spectrum, Chelsea Building Society’s SVR is far higher at 7.24%. Here monthly repayments would set you back £1,083 — that’s £233 more each month than a borrower would pay on Nationwide’s SVR.

Should you choose the SVR now?

If your current lender has a brand new, cheap SVR and your introductory deal with them is due to end soon, lucky you! There’s certainly a case for sticking where you are — at least in the short-term.

Better still, you’ll be moved onto the SVR automatically if you don’t do anything else, so it should be a hassle-free option. And you won’t normally have to shell out for an arrangement fee, or be tied-in if you decide you want to remortgage elsewhere later on.

For those of you with a relatively small mortgage, avoiding high remortgaging fees becomes even more important. It may be more cost-effective to move onto your lender’s fee-free SVR, rather than pay arrangement fees for a special rate with another lender — even if that rate is lower. Make sure you compare mortgage deals on the basis of true cost before you take the plunge.

New borrowers

But what happens if you aren’t an existing borrower? The trouble is — even though SVRs were once the lender’s bog standard, no frills home loan — now they’re far more attractive, many are simply no longer widely available to borrowers.

Nationwide’s SVR is really tempting, but alas it isn’t open to new borrowers or remortgagers. And you won’t be able to get your hands on Lloyds TSB’s 5% SVR now either. This is becoming a pretty common story these days.

SVRs are certainly more exclusive today than they have been in the past, but it’s not impossible to find a competitive deal which is still open to new borrowers.

Bristol & West, for example, offer an SVR at an appealing 5.49% which is available to all new customers.

What’s more, there’s no arrangement fee and no early repayment charge. You will, however, need a deposit, or equity stake in your home, of at least 25% to qualify.

Just one word of warning: if you can find a competitive SVR with a new lender do watch out for the arrangement fees. With SVRs you won’t normally be tied-in, so the lender has no way of knowing how profitable you’ll be to them as a borrower, or for how long. So to boost the lender’s profits in another way, arrangement fees have been creeping up.

Should you stay or should you go?

If you’re starting to think your lender’s SVR could work for you, do bear these points in mind:

• Your lender will decide what rate the SVR will be set at, so there’s absolutely no certainty what will happen to your repayments in the future.
• Your lender may choose not to pass on future base rate cuts. If your lender has already dropped the SVR by 1.5%, they may not be so keen to pass on further reductions to borrowers.
• Other deals may be more suitable for you. If you want to know exactly how much your mortgage will cost each month, go for a fixed rate instead.
• Tracker mortgages look attractive when the base is expected to fall because lenders have to cut the rates accordingly — unlike SVRs. Further reductions are on the cards, so you may prefer this type of deal.

Choosing the right mortgage can be been tricky. If you need help, why not speak to a broker at Best Home Mortgage.

The good news for homebuyers looking for the best home mortgage is that lending rose slightly in October, according to the Council of Mortgage Lenders (CML).

Total lending rose 7% up from the previous month, to £18.7bn. However, last month’s lending was still 44% lower than in October last year, just before the credit crunch triggered the current mortgage drought.

The Council of Mortgage Lenders (CML) said that despite the Bank of England’s cuts in interest rates, lending would remain weak in the next few months and 2008 may be the year which saw the biggest slump in home sales and prices on record.

Some experts have suggested that the fall in mortgage lending may now have reached a trough.

This week the Royal Institution of Chartered Surveyors (Rics) pointed out that its own surveys had shown a recent increase in enquiries from potential new homebuyers, a good indicator of future trends in home sales.

Even if mortgage lending and home sales stabilise at current levels, many experts are forecasting that prices will continue to fall, with some suggesting that they could go down by a further 15-20% in 2009 after a likely drop of around 15% this year.