Brokers have warned the FCA not to restrict the ability of lenders to change standard variable rates despite controversy over several firms doing so in the past few years.
Last week, the regulator published a discussion paper, called Fairness of Changes to Mortgage Contracts, asking consumers for feedback on their experience of changes to the terms of their mortgages. This included seeking views on whether there are fair reasons for lenders to increase SVRs, whether consumers would expect a fixed-rate contract to change before the end of the term and whether terms should be allowed to change if a mortgage is taken over by another lender.
The FCA suggests three options: taking no further action, providing further guidance on the current rules or introducing new rules. The latter could include restricting the changes lenders can make to regulated mortgages.
The paper follows a Dear CEO letter sent to banks and building societies in November after a number of lenders approached the regulator about making changes to their mortgage contracts including SVRs. The regulator raised concerns about whether these rate hikes were fair.
Some 6,700 West Bromwich Building Society borrowers on buy-to-let trackers saw their rates increase by 2 per cent last December while Bank of Ireland wrote to 13,500 buy-to-let and residential borrowers in February 2013, saying their rates would be hiked. Other lenders which have chosen to increase their SVR, as opposed to the tracker rate,
include Skipton Building Society and Santander.
But brokers say placing restrictions on SVRs would be a mistake. Middleton Finance mortgage broker Daniel Bailey says: “People were furious about the SVR decisions but restricting changes is difficult because lenders need to react to movements in the economy and if they can’t, they could end up in financial difficulties. I don’t see them doing it.”
Clayden Associates chartered financial planner Dan Clayden says: “It is totally OK to change the SVRs, even without base rate changes. The clue is in the name: variable. Providers of financial services should be able to charge what they want.”
But GM Financial Services managing director Gerry McKeon says if people want more certainty in the relationship between the base rate and their mortgage rate, SVR mortgages are the wrong product.
He says: “People need to understand the difference between SVRs and tracker mortgages. SVRs are a little bit riskier because they can change at the discretion of the lender at any time.”
Zen Financial Services IFA Mike Pendergast says by restricting changes to terms to protect consumers, the regulator could undermine another of its objectives – promoting effective competition.
He says: “Any restrictions it looks to bring in should go out to consultation and I don’t think lenders will be happy about it. If rates rise more than expected and lenders are borrowing at much higher costs but are restricted in what they can charge, they are going to lose money and could stop lending because it isn’t profitable.”
Other new rules the regulator may consider could affect disclosure to clients or introduce new safeguards to protect “the most vulnerable consumers”.
Brokers say guidance on the disclosure rules could be helpful.
Bailey says: “Consumers are aware that when they come out of a fixed term and go onto an SVR, their payments could increase but it’s important they are made aware that the actual SVR rate can change.”
Clayden says: “Some sort of guidance – making clear advisers should point this out and lenders should not make these changes or the regulator could look at taking action – is probably the way forward.”
While the FCA paper asks about the “fairness” of changes to rates within fixed mortgages, Bailey says that in 12 years he has never seen it happen.
Clayden adds: “I’ve never known anyone to be on a fixed rate and the terms have changed. Surely that is a breach of contract? In that case, there doesn’t need to be a change in regulation, just enforcement.”
Since its introduction in April, the Mortgage Market Review has tightened the criteria for getting a loan.
McKeon says the affordability tests are preventing some borrowers from shopping around to escape rising rates. He says: “The MMR’s requirements mean some people get stuck with their current lender when their SVR changes or they get to the end of a fixed-rate term and the rate goes up. That is a bigger problem than the actual rates changing.”