Rising SVRs bring spectre of payment shock

Tuesday 12th January 2010

By Michael White, chief executive of online mortgage advisers, Email Mortgages

Whisper it quietly but there seems to be a growing feeling amongst the mortgage intermediary community that 2010 could be the year when the remortgage market makes something of a comeback.  While we’re not talking about anything in the ball park of say the Take That reunion, it is possible to envisage a year in which remortgaging is actively encouraged and business levels pick up substantially. 

There are certainly signs that the many borrowers who have felt comfortable sitting on their lender’s SVR, will now be thinking much harder about their remortgage options.  So, why should this be?  Well, a number of lenders have already turned up the heat with some increasing their own SVRs with no prompt from Bank of England Base Rate rise. 

This seems like a move to encourage people who are considering a new mortgage not to wait too long to bag one.  From this, we can already surmise that 2010 will be a year when many lenders show an increased desire to conduct lending business; in effect the necessity to do this is outweighing the fear of the Credit Crunch and the recession.

While many borrowers will be perturbed by lenders increasing their SVRs with no Base Rate increase, lenders are well within their rights to do so.  Building societies seem to be jumping over themselves in order to raise their SVR at present.  Marsden BS was the latest to do this when it increased its SVR from 5.49 per cent to 5.95 per cent; others such as Accord (part of Yorkshire BS), Cambridge BS and Kent Reliance all increased their SVRs at the tail end of last year with some Society’s going as high as 5.99 per cent. Borrowers on this so-called “deal” are unlikely to stay for long.

Brokers have spent the last year or so having to accept that, for many existing borrowers, there is nothing better than SVR.  For example, if you’re currently on C&G’s 2.5 per cent SVR then it is unlikely that a 3.99 per cent fixed will tempt them.
The difference in today’s market is that we seem to be at something of a tipping point. Some lenders peg their SVRs to Base Rate but many do not and this could create a market division.

The conundrum for the broker is explaining that the SVR could soon become uncompetitive for their client. If they wait until the SVR increases, not only will the headline mortgage rate they are paying start to look much less attractive but they could also be caught up in a remortgage ‘Perfect Storm’ in which every other SVR borrower is looking for a deal at the same time.  It should be fine if you’re a clean borrower with a low LTV.

But what about those who don’t fit this bracket?  Will they be welcomed with open arms by the lending community which is still looking for relatively risk-free business?  I doubt it.

Clients might scoff and decide to sit still. While the option of jumping from GBP 500 per month to GBP 600 per month will not be logical to many, brokers should highlight the danger of payment shock with clients unable to move quickly enough to stabilise payments. In this relatively constrained mortgage market this could be a very real problem.

It is likely that the longer we go without an increase in base rate, the bigger the risk that societies and other lenders feel they have to increase SVR. 

Why not point out the following: everyone wants to ‘buy’ at the bottom and sell at the ‘top’ of the market – it’s called greed.  But, the danger for clients will be waiting too long, watching the short-term movements without deciding on a much longer-term financial position.

Michael White is both founder and chief executive of online mortgage advisers, Email Mortgages.com  Email Mortgages was established in 2008 and is a mortgage advisory practice providing consumers with tailored fee-free advice online via email.  Michael has been working in financial services for over 30 years and been involved in a number of new business start-ups including Chase Manhattan Homeloans, Legal & General Mortgage Services and Kensington Mortgage Company.  His last job prior to Email Mortgages was as founding director of the lender London Mortgage Company, established in 2001 and sold to Lehman Brothers in 2006.