Banks and building societies are continuing to introduce measures to prevent customers from taking out standard variable rate (SVR) mortgages.
Halifax, the UK’s largest mortgage lender, and Lloyds TSB have both announced they are scrapping SVR mortgages for new customers after they were flooded with new applications.
Mortgage experts now say there is a strong possibility that C&G, which has a comparable SVR to Halifax and Lloyds TSB and has been equally active in repricing up mortgage deals, may be the next one to add provisos to its offerings.
Traditionally, mortgage borrowers reverted to SVRs when their fixed rate or tracker deal expired. SVRs tended to be higher than the initial deal rate, and were often 200 basis points above the bank rate.
And there was a time when mortgage lenders would have liked nothing better than letting customers move on to their SVRs, and collecting the high rates of interest. Not any more.
Nowadays, as lenders have passed on the effect of higher wholesale funding costs through higher fixed and tracker mortgage rates, SVRs have begun to look like a cheaper option, especially as they often do not require set-up or repayment charges.
Another advantage of being the SVR is that lenders have to pass on cuts in base rates to borrowers. So they are moving downwards, while the cost of new fixes and trackers continues to edge upwards, says Melanie Bien, director of mortgage broker Savills Private Finance. Stafford Railway Building Society, for example, has an SVR of just 5.99 per cent.
But Halifax says its SVR, at 7 per cent, is designed for existing customers and was never intended as a product for all new customers. It also suspects that customers who apply now for SVR mortgages intend to take their custom elsewhere soon.
“We expect many of these customers will only remain on our SVR mortgage for a short period of time as they continue to look for a cheaper product from a different lender,” said a spokes-person for Halifax.
Ray Boulger at John Charcol explained that many borrowers don’t want to lock into fixed mortgages right now in the hope that rates for tracker and short-term fixed deals will come down when the credit crunch eases. These customers are choosing an SVR mortgage as a way to bide their time.
Others have been attracted by the fact that SVRs have a single rate and do not distinguish between those with large or small deposits. Buyers with little or no deposit are being pushed out of the market as lenders raise their loan to value (LTV) requirements for fixed rate and tracker mortgage deals.
Nationwide reacted to this by moving last week to prevent new borrowers from taking out its SVR mortgage unless they had 25 per cent equity in their homes or a 25 per cent deposit.
Other lenders have sought to curb the popularity of their SVR mortgages by imposing charges. Woolwich has set a 1 per cent fee on transfers to its SVR mortgage and Skipton Building Society now charges new borrowers £799 for a SVR.
Halifax’s move, however, is a very blunt instrument with which to tackle the situation, said Boulger. He said that he expected other lenders to take a more subtle approach, such as creating tiered rates for SVRs, depending on the level of equity or deposit a borrower has.
He has also questioned the wisdom of blocking customers from using SVR mortgages.
Perhaps, he said, lenders should consider encouraging customers to buy into their SVR mortgages.
“Once conditions improve those same customers will be more willing to stay with the same lender,” he says.
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