There are over 4,000 mortgages available in the UK. If this choice is not
bewildering enough for the borrower, these mortgages come in a variety of
shapes and sizes – special rates for different periods as well as different
conditions and offers.
There are also different methods of calculating mortgage interest,
including tracker rates based on the Bank of England base rate, standard
variable rate and Libor.
The latest Council of Mortgage Lenders' figures show 63 per cent of UK
mortgages taken out in the first quarter of this year were on standard
variable rate or an equivalent.
The lifetime of most mortgages is about five to seven years, meaning even
those borrowers on initial special rates are likely to spend at least a
short time on a lender's standard rate as many special rates only last two
or three years.
These figures show it is vital that there is a clear understanding of the
benefits and disadvantages of these “standard” types of calculations for
both broker and borrower.
SVR is often classed as the industry standard. By using SVR as a method of
calculating interest, borrowers are given the opportunity to compare
products accurately and realistically from different lenders.
One important advantage of SVR as a way of calculating interest over Libor
or bank base rate is that control lies with the lenders. Any broker or
lender will agree that the mortgage market has become increasingly
cut-throat over the last few years. Not only has this had an impact on the
type of special-rate products available but also on lenders' SVRs.
SVR is not solely controlled and dominated by what is happening in the
money markets. Borrowers can guarantee that SVR in whatever sector of the
market (for example, sub-prime, self-cert or mainstream) will be
competitive as every lender faces pressures in an attempt to secure
Because a lender's SVR is dependent on these pressures, if Libor or bank
base rate do decrease, it is likely that SVR will follow suit. As a result,
borrowers can still achieve the benefits that a drop in either of these
rates would bring (and likewise the same may occur with an increase of
For the consumer, it could be argued it is better to have these two forces
acting on their mortgage rate rather than just one. The main criticism of
SVR is there is no immediate tracking of bank base rate movements and there
may be occasions when lenders do not pass on a bank base rate cut
immediately to their customers.
However, given the competitive climate on winning new customers and
keeping existing customers, these occasions are less likely to occur.
Libor is the price that banks within London sell money to each other.
Rates based on Libor are often favoured by sub-prime or non-conforming
lenders. One advantages is that it is transparent.
Lenders who use Libor normally set their rate on a quarterly basis and it
can take a while for rate changes to feed through to the borrower.
Exponents of this method also claim it can be an early indication of what
is going to happen with bank base rate.
One major problem with Libor is that few people understand what it is, as
it is not heavily publicised and it can make the selection even more
confusing for borrowers.
Over the last 18 months, Libor has fluctuated more frequently than bank
base rate and November 2000 was the only month since the start of 2000 when
the rates were identical at 6 per cent. This means that borrowers on
Libor-based rates have experienced more changes (both positive and
negative) in their payments over the last year.
Bank base rate has similar advantages to Libor in terms of transparency –
most lenders operate a tracker rate tied to bank base rate and as a result
rate movements are transparent. Although in the past this has been in
relation to specific products, many lenders are now choosing their method
of calculating interest for all products from bank base rate plus basis
Much as transparency is an advantage with both Libor and bank base rate,
it can also be a disadvantage when rates rise. SVR forces lenders to make
changes largely bec-ause of competitive pressures and, as a result, may
hold off rises. Bank base rate and Libor-based rates are unable to do this.
It is clear that there are advantages and disadvantages to all these rates
but will mortgage regulation, due to come into effect over the next year,
do anything to clear the confusion? One area that the recent FSA draft
paper focused on is the calculation and app-roach to the annual percentage
Last year, the DTI amended this calculation to make it clearer to
borrowers. The FSA still believes there is validity for this type of
calculation to be displayed but may make further amendments to the
calculation later in the year.
What the FSA hopes is that these changes, combined with the additional
clarity required in the presentation of APRs, will enable customers to
compare products accurately. However, as few mortgages run their full
20-25-year cycle (on which the APR is calculated), this figure may not
prove to be that essential for comparison.
It is clear that, until all lenders adopt a uniform app-roach to the way
in which they calculate interest rates, there will always be difficulty for
borrowers to define what is the most competitive deal. What brokers can
ensure, though, is that the difference in these interest rates are clearly
exp-lained so that, at the least, the borrower is fully informed as to
Sales and marketing director,