News Review: SVR


SVR analysis will help clients by


Ray Boulger, senior


technical director, John Charcol


early last year, with house prices at their recent floor and, in reaction to the Lehman Brothers bankruptcy,


mortgage


lenders having tightened the screws (particularly for borrowers with little equity in their property) remortgaging was not an option for many borrowers. in april 2009 the council


of mortgage Lenders estimated that about 900,000 mortgage accounts were in negative equity and John charcol estimates that at the same time another 1,500,000 borrowers had less than 15% equity in their home. out of 11.25 million non- commercial


mortgages


in the uK, 10 million are residential and the other 1.25 million buy-to-let and thus around 25% of uK residential mortgage borrowers would not have even been in a position to consider remortgaging in the first half of last year.


The situation now as the rapid fall in Bank rate in late 2008 and early 2009 progressed lenders increasingly failed to reflect the cuts in their SVr, which of course in most cases was their prerogative as the SVr is a managed rate. a few lenders, in particular


nationwide, Lloyds tSB, cheltenham & gloucester, intelligent Finance, Halifax


and Skipton, had contractual clauses in their mortgage offers which committed them to limiting the margin between Bank rate and their SVr to either 2% (nationwide, Lloyds tSB, cheltenham & gloucester, intelligent Finance) or 3% (Halifax and Skipton). thus these lenders had no option but to follow Bank rate all the way down, once this margin had been reached. the lenders with a maximum margin of 2% had no wiggle room because the commitment was given unconditionally, but Halifax and Skipton had been cleverer. indeed Halifax had increased the maximum margin above Bank rate allowed on its SVr from 2% to 3% in october 2008,


just before the big fall in Bank rate started. its terms and conditions allowed it to do this provided it gave one month’s notice to all borrowers on its SVr or who reverted to it and allowed all such borrowers with early repayment charges to redeem their mortgage without incurring any charges.


Skipton, on the other


hand, had a “get out” clause in its mortgage contract, which allowed it to abandon the maximum guaranteed margin of 3% above Bank rate in “exceptional circumstances” and it increased its SVr from 3.5% to 4.95% from 1 april this year.


What constitutes


“exceptional circumstances” was not defined in its mortgage offers, and there may still be action in the


16 mortgage introducer JULY 2010


courts from borrowers in due course. Because they were unable


to increase their SVr on existing mortgage contracts nationwide, Lloyds tSB and cheltenham & gloucester have introduced a new SVr for all new mortgage contracts, with a rate of 3.99%. new borrowers, and existing borrowers choosing to effect a product transfer, will revert to this higher SVr but existing borrowers on SVr will continue to pay Bank rate + 2%, currently 2.5%. However,


nationwide


introduced this change a year ago and since then has offered some 1-year fixed rates. therefore a few of its borrowers may be reverting to its higher SVr soon. as well as not following


Bank rate all the way down at least 16 lenders have increased their SVr since Bank rate bottomed out at 0.5% in march 2009. the latest increases, from the beginning of this month, come from the Leeds and Buckinghamshire building societies.


Remortgaging Why is now the time for clients to start thinking about remortgaging? Before the credit crunch borrowers strived to avoid being on their lender’s SVr, but now many feel comfortable sitting on the SVr, partly because if they were previously on a fixed rate they have probably reverted to a lower rate and partly because of the perceived difficulty of remortgaging in the current market.


However, remortgaging


away from an SVr is now a much more viable option than it has been for over two years for the following reasons:  no lender has cut its SVr for nearly a year but 16 have increased their SVr since Bank rate fell to 0.5%.  With two lenders having increased their SVr this month already borrowers paying SVr are much more likely to see their rate increase than decrease, even without a Bank rate increase.  House prices have recovered to an average of only 9.1% below their peak, according to  nationwide’s “real,” i.e. not seasonally adjusted, house price index.  Borrowers with a 25-year repayment mortgage will have typically paid off 2% of their mortgage each year, thus improving their LtV further.  the margin over Bank rate of tracker mortgages has fallen over the last year, with rates starting around 2.5% (ignoring deals with big percentage fees, which have even lower rates).  the cost of fixed rate mortgages has fallen sharply over the last few months, with 5-year fixed rates starting around 4% and at the cheapest level since 2003. the availability and


pricing of mortgages at higher LtVs has improved significantly and so even remortgaging with an 85% LtV will be worthwhile for some borrowers. nearly all borrowers on SVr will


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