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Mortgage View: Playing from the base line

Many lenders have yet to respond to this month’s base-rate cut. For most, the delays are attributed to Halifax wrong footing the market. The last two interest-rate cycles have seen lenders widening their margins by failing to pass on the full effect of base-rate decreases, yet they pass on the full impact of any increase. Many in the industry expected this cycle to be repeated.

However, for those operating on 2 per cent margins at SVR, Halifax has already premeditated the stance that it did not need any further margin and passed on the base-rate cut in full almost immediately after the MPC made its announcement. This surprised a number of its competitors which have since reconsider their position.

Most of the big-name lenders in the market operating on 2 per cent margins have sustained this position and passed on the base-rate cut. Those operating on tighter margins on SVR, notably Nationwide, have not passed on the cut fully.

You would expect to see this narrowing of competitive position as base rates decrease but from an intermediary’s perspective it does nothing more than emphasise the need to utilise base-rate-based products.

Although surveys suggest that 50 per cent of borrowers remain on lenders’ SVRs, most intermediaries disagree with this. As a result of intense remortgaging and enhanced retention activity by lenders over the last few years, the figure is closer to 30 per cent. The lenders’ ability to manage their margin on a month-to-month basis on only 30 per cent of their book exacerbates the importance of SVR-based loans.

The majority of new business and retention business is being written on fixed margins, with either fixed rates or base-rate trackers. This places extra leverage on the importance of moves in the SVR to lenders which may account for some lenders delaying their rate changes.

Discounted products are starting to appeal to consumers more. Any lender which is concerned about its margin management capability, in view of potential decreases in base rate, should put their product emphasis on discounted SVR rather than base-rate products.

With the possibility of a further base-rate cut and a suspicion that, if this were to occur, lenders would not pass the rate cut on in full, an SVR discounted product, which beats a discounted base rate, may not be as attractive as it seems.

If we continue to put new customers into base-rate-based products, the volume of SVR-based lending will decline, making lenders even more reluctant to reflect base-rate decreases in full.


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