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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&#39 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&#39s 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&#39 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&#39s 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

their options.


Sales and marketing director,

Mortgages plc


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