Could you remortgage and give yourself a £2k income boost?
Homeowners could save a combined £3.9bn a year by switching products, the equivalent of a significant after-tax pay rise, according to research by Legal and General Mortgage Club.
The mortgage distributor said there is a price to pay for complacency when borrowers could effectively boost their disposable income by remortgaging.
How much can you save?
Swapping existing mortgages from the Standard Variable Rate (SVR) to a more competitive product could save the average homeowner over £2,000 a year, the equivalent of a 7.2% jump in salary.
Homeowners on a competitive two-year fixed rate deal currently available on the market could save £172 a month, or £2,062 over a year, compared to borrowers who remain on a lender’s SVR, said Legal and General.
With 1.9m homeowners currently caught on their lender’s variable rate (1 in 6 mortgage borrowers), a huge portion of the UK could save a substantial amount of money simply by searching the market for alternative offers. For homeowners on SVRs across the UK, this equates to a staggering £3.9bn a year.
But L&G said borrowers fall into different camps when it comes to switching, and it can seriously impact their pocket. Below is the firm’s rundown of the different attitudes to remortgaging and what they can mean for borrowers’ finances:
1: The continually complacent
Despite speculation of a rate rise looming, and warnings that headline low rates won’t be around forever, these borrowers stick with their current lender’s SVR. They are satisfied with their deal, and do not anticipate an interest rate rise impacting their monthly payments of £793. However, by not reviewing their deal, they risk paying an extra £682 per year every time the SVR increases by 0.5%.
2: The flexible financer
Listening to a mortgage broker’s advice, these borrowers rethink their current deal – their lender’s SVR of 4.74%. As a result, they switch to a two-year fix from a high street lender. This has a rate of 1.69% and a fee of £999. Despite the initial cost, their monthly interest payment is reduced to £630, saving them £221 each month and £5,309 over the fixed rate term.
3: The reluctant reviewer
Currently on an SVR from their lender, these borrowers are likely to wait until 2017 before deciding to shop around. By then, banks may well be pricing higher rates into their products. While they have saved money by eventually switching from an SVR, they do not save as much as those borrowers who acted earlier. If their lender’s SVR were to increase by 0.5% before late 2017, this borrower would only reduce their monthly payments by £184 a month and £4,413 over the fixed term.
Jeremy Duncombe, director of Legal & General Mortgage Club, said: “Today’s borrowers are missing out on some great opportunities to save, mainly due to complacency. Simply switching deals to a more competitive rate could make a significant difference to their everyday life, particularly at a time when wage growth is relatively low.
“Now is the perfect time to review current deals, especially for those on an SVR or coming to the end of a mortgage term. Homeowners should contact an adviser to explore the idea of swapping to a different mortgage deal, which could give them the equivalent of a hefty pay rise. Those who act now may see significant benefits in the years to come, as they’ll able to take advantage of current interest rates while they are still at an all-time low.”