There are many reasons behind the increase in SVRs, writes Phil Whitehouse, chief executive of TMA.
For many, and perhaps naturally on the back of the recent furore over bank bonuses, the current rises in SVRs announced could be perceived as yet more greed on behalf of the banks. However this initial reaction, although understandable, is somewhat unfounded, as there is more to the situation than realised at first glance.
Of course, when it comes to understanding the reasons behind the latest rate hikes, it hasn’t helped that several banks have made this move at similar times. Halifax set the ball rolling and others, seeing the opportunity to review their positions and terms of their mortgages, followed suit, which has generated some negative feelings. Although not all lenders have increased their SVR, I’m sure they are all evaluating their own positions.
Clearly banks need to make a profit and, in the case of the state owned banks, try to return some tax payers’ money. On this occasion however, I believe bigger forces have had a hand in the latest SVR rises.
Many mortgage borrowers have been on a standard variable rate (SVR) which has been relatively low for a couple of reasons. Firstly, the Bank of England base rate has been set at 0.5% for the last three years meaning SVRs that are linked to the base rate have been kept low – a case in point being Nationwide, with their SVR interest rate commitment.
Secondly, and most importantly, the Bank of England Special Liquidity Scheme (SLS), which was introduced to help improve flow of money into the banking system following the credit crunch, closed on 30 January 2011. This scheme allowed banks and building societies to swap high-quality mortgage-backed securities for UK Treasury Bills, for up to three years. This meant the banks could get hold of reasonably cost effective funding for their mortgage books. Since the closure of the SLS the banks have had to go back to the more expensive retail and wholesale markets for money to fund the mortgage lending proposition.
This extra expense now needs to be covered to enable the banks to return to profit, hence the rate increases. It may also mean that other low rates of interest and competitive deals on mortgages that have been out there for some time will come to an end and borrowers will need to spend more of their income on funding mortgage repayments.
So what can existing borrowers and intermediaries do in the market? Of course borrowers should consult a good mortgage broker to review all their options, but surely the onus of responsibility should be with brokers, who have their clients’ best interests at heart, to get in touch and review their current mortgage provision.
These recent changes certainly give us as a mortgage club an opportunity to engage with our members and encourage them to do the same with their clients. Helping their clients to understand what is happening with SVRs and the impact it will have on their mortgages, and to look at what alternatives they have rather than just accept a payment hike that could stretch the family budget.
We will be supporting our club members, with information and guidance, encouraging them to look at the track record of a lender’s SVR and to bear these trends in mind when choosing a lender, rather than perhaps just considering the headline rate on the new mortgage. Looking carefully at product transfer rates, to find those that involve little or no upfront costs, is also imperative to ensure these costs don’t outweigh any reduced interest rate proposals.
For new borrowers, the natural place to look will be the range of fixed rate mortgages that are available and that may mean looking at longer term rates than two or three years.
The days of strong competition on mortgages, that has kept interest rates low, may have come to an end for the foreseeable future, so everyone will have to be more analytical and thorough in their research.
At TMA we will continue to work with lenders to secure the best deals and ongoing rates for our intermediaries, to ensure they have access to the best products for their customers.