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UK Homeowners Experiencing Multi Billion Pound Mortgage Windfall

by Jim ONeil on October 25, 2011

in Mortgages

The Council of Mortgage Lenders (CML) revealed that in 2010, nearly two million UK households made a move that will save them an average of £2,600 annually. They opted for a standard mortgage loan after the expiration of their original fixed-term mortgage. The switch was valued at approximately £4 billion per year.

Typically, the standard variable rate (SVR) offered by a lender is higher than its fixed rate loans, which makes this situation unusual. SVR is tied to the Bank of England base rate, which fell due to the financial crisis. Currently C&G and Nationwide have 2.5 percent SVRs. In June 2008, it would have cost 6.6 percent to take out a two-year fixed rate loan.

Some economists worry about borrower shock when the base rate increases from its historic 0.5 percent low. The CML is not concerned because rates are only expected to increase to 0.9 percent by the end of 2012 and to two percent by 2015. If this happens, 85 percent of variable rate mortgage holders will still have lower payments at the end of 2012 and about 58 percent will be paying less than their original payment through the end of 2014.

According to the CML research, most borrowers have either ten or 20 percent equity in their homes, making refinancing attractive. The Bank of England reports that remortgaging does not pay for homeowners with a ten percent deposit. For them, the average fixed rate for a two-year loan is 5.28 percent, whereas the average SVR is 4.11 percent.

Approximately 1.5 million homeowners have fixed rate mortgage loans that expire in the next two years. Remortgaging may not be as exciting for them because many of them have cheap loans. They may not receive the same windfalls in interest rates as people who took out mortgages during 2007 and 2008.

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