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Raising the standard

Brokers feel Halifax’s move to raise its SVR could be the start of a chain reaction, Paul Thomas reports

Borrowers on lenders’ standard variable rates are being urged to review their mortgage due to fears that lenders will increase their rates.

Last week, Halifax announced its SVR would increase from 3.5 per cent to 3.99 per cent from May 1, blaming increased funding costs for the move.

The lender previously announced it was increasing the cap on its SVR for 40,000 existing borrowers who have part of their mortgage on SVR and part subject to early repayment charges. The cap is rising from base plus 3 per cent to base plus 3.75 per cent on March 31.

Despite increasing its SVR, Halifax’s reversion rate is not out of line with its peer group. Santander, Barclays, RBS, Nationwide and ING Direct have SVRs of 4.24 per cent, 4.99 per cent, 4 per cent and 3.5 per cent respectively.

However, brokers feel this could be the start of a chain reaction that may see other lenders follow suit and increase their SVRs.

If I Were You chief executive Rob Clifford says: “Given the real cost of funding facing lenders, it is entirely likely that more lenders will seek to create additional margin in mortgage pricing and removing any barrier to doing so, such as SVR caps, is an obvious blockage to clear.”

Halifax’s move to increase its SVR cap has got brokers urging borrowers on these rates to review their mortgage.

Lentune Mortgage Consultancy director Stuart Gregory says: “Once one lender adjusts its cap and increases its SVR, others will do the same. Rates have been static for a long time but I think now people have to start reviewing their position.”

London & Country associate director of communications David Hollingworth says borrowers should not be fooled into thinking rates will not move while bank rate remains at 0.5 per cent.

He says: “Customers must realise there could be movements in mortgage rates without any changes to base rate. It highlights the fact that borrowers cannot just wait for base rate to move, funding costs will affect mortgage rates and that applies to new and existing borrowers.”

Funding pressures aside, lenders also have to bolster their capital ratios with the introduction of Basel III, which will effectively set a key capital ratio of 7 per cent, more than triple the current level, in January next year.

Home Funding chief executive Tony Ward says: “Why would banks want to increase their SVR? To make more money. Why do they want more money? Probably to buffer their capital ratios as banks are still trying to build capital ready for when Basel III kicks in in 2013.”

Banks can look to make more cash through pricing in two ways. The first is to increase the price of new lending, which has been happening steadily since summer last year, or to increase their SVR, which will affect existing borrowers.

One of the advantage of increasing SVRs is that lenders will see the benefits of the rise straight away, as opposed to having to wait for the discount period to end with new lending. It must also be noted that lenders’ back books will be significantly bigger than the volume they will lend in any one year, meaning they can maximise returns.

Ward says: “If you increase the rates on your back book as opposed to new lending, it has an instant effect, as on new business you have to wait for the discount period to end.

Raising new lending rates will have a relatively muted effect in comparison as the level of lenders’ new lending will be much less than its back book.”

Borrowers who have a mortgage with building societies may be more likely to face an SVR increase than those who have their mortgage with a major high-street lender.

This is because building societies not only have to contend with increased capital requirements and funding costs but also have to compete with the bigger players for savings deposits, from which most of them rely as their main source of mortgage funding.

This is highlighted by the fact that 13 out of the 18 lenders that have increased their SVRs since the Bank of England lowered bank rate to 0.5 per cent in March 2009 are building societies.

Ward says: “The same pressures that apply to banks apply to building societies but there are other issues as well. Building societies, particularly the smaller and medium- sized societies, are pre-dominantly funded through retail deposits and they really have to pay out to get that money in, so their margins are under pressure.

“They are having to do something on the asset side of things to maintain margin because of what they are having to pay for the cost of funds.”

But some brokers do not see Halifax’s move as the start of a wave of SVR increases.

John Charcol senior technical manager Ray Boulger says: “I do not think this will result in a raft of lenders increasing their SVRs. This is not about Halifax leading the market upwards in terms of SVRs, it is about Halifax bringing itself into line with its peers.”

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