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Wednesday, 4 April 2012

SVRs going up Why? What are the Implications?

During Quarter 1 of 2012 a number of high-street lenders have announced increases in the standard variable rates (SVRs) – the revert-to-rate that mortgage borrowers pay their mortgage interest at after their fixed/tracker rates expire.

Prior to 2007 the normal course of action for mortgage borrowers coming off fixed or tracker rates was to look for an immediate remortgage onto a deal that worked out better for them than their lenders SVR.

Following the “Credit Crunch” and the Bank of England’s move to reduce the Bank of England Base Rate to nearly zero, borrowers have tended to stay on their lenders SVRs. This is for two primary reasons (1) The SVR was cheaper than any fixed rates available elsewhere and (2) the tightening of lending requirements meant that many borrowers are simply unable to remortgage.

The reason cited by lenders for increasing their SVRs is that the wholesale cost of funding for them has increased and they need to increase their rates to pass some of these costs onto the borrowers.

If funding pressures is the real reason for general SVR increases by the lenders one has to question why this is occurring in Q1 2012 rather then Q3 or 4 of 2011. Funding costs on the wholesale market were at their most acute in the second half of last year when the Eurozone debt crisis was at it’s height. Since the the ECB has pumped billions of Euros of liquidity into the banking system resulting in funding costs reducing in 2012. It is simply not logical that the SVR rises are coming now if they are based on funding costs alone.

An alternative reason for increase in SVRs may be an attempt by lenders to reduce the size of their loan books by driving mortgage customers to their competitors. Whilst increasing SVRs may be a way of reducing loan books it will also have the bi-product of reducing the quality of loan books at the same time since only the “good” customers who qualify to remortgage will be able to move away leaving “bad” customers who are trapped with their current lenders on their SVR because for financial or other reasons they simply cannot get another mortgage elsewhere.

Could the real reason for the rises be an attempt to stress test their loan books to identify the number of loans at risk to general rate rises when they inevitably come?

Whatever is the true reason for the increases what impact will this have on the mortgage market?

In normal circumstances I would suggest that lenders increasing SVRs would increase remortgage volumes as borrowers try to shop around for better deals. But since 2007 normal circumstances do not apply!

There may be a small increase in remortgage activity but I believe the vast majority of mortgage customers remain trapped with their current lenders unable to remortgage. The number of borrowers sitting on SVRs is increasing by the month and increasing the SVRs will simply put the normal mortgage borrower who is already under financial pressure due to inflation under greater financial stress.

As a result, my concern is that the real outcome of these rate rises will simply be an increase in the number of borrowers in arrears on their mortgages and inevitably an increase in mortgage repossessions. I hope that I am wrong!

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