Posted on 8 June 2010 by
Ray Boulger of leading independent mortgage adviser John Charcol, analyses the SVR market and reports on how many people can offset the cuts in their standard of living the Prime Minister has told us to expect by cutting their mortgage payments.
The situation early last year:
Early last year, with house prices at their recent floor and, in reaction to the Lehman Brothers bankruptcy, mortgage lenders having tightened the screws (particularly for borrowers with little equity in their property) remortgaging was not an option for many borrowers.
In April 2009 The Council of Mortgage Lenders estimated that about 900,000 mortgage accounts were in negative equity and John Charcol estimates that at the same time another 1,500,000 borrowers had less than 15% equity in their home. Out of 111⁄4 million non commercial mortgages in the UK 10 million are residential and the other 11⁄4 million Buy to Let and thus around 25% of UK residential mortgage borrowers would not have even been in a position to consider remortgaging in the first half of last year.
The situation now:
As the rapid fall in Bank Rate in late 2008 and early 2009 progressed lenders increasingly failed to reflect the cuts in their Standard Variable Rate (SVR), which of course in most cases was their prerogative as the SVR is a managed rate. A few lenders, in particular Nationwide, Lloyds TSB, Cheltenham & Gloucester, Intelligent Finance, Halifax and Skipton, had contractual clauses in their mortgage offers which committed them to limiting the margin between Bank Rate and their SVR to either 2% (Nationwide, Lloyds TSB, Cheltenham & Gloucester, Intelligent Finance) or 3% (Halifax and Skipton). Thus these lenders had no option but to follow Bank Rate all the way down, once this margin had been reached.
The lenders with a maximum margin of 2% had no wiggle room because the commitment was given unconditionally, but Halifax and Skipton had been cleverer. Indeed Halifax had increased the maximum margin above Bank Rate allowed on its SVR from 2% to 3% in October 2008, just before the big fall in Bank Rate started. Its terms and conditions allowed it to do this provided it gave one month’s notice to all borrowers on its SVR or who reverted to it and allowed all such borrowers with early repayment charges to redeem their mortgage without incurring any charges.
Skipton, on the other hand, had a “get out” clause in its mortgage contract, which allowed it to abandon the maximum guaranteed margin of 3% above Bank Rate in “exceptional circumstances” and it increased its SVR from 3.5% to 4.95% from 1 April this year. What constitutes “exceptional circumstances” was not defined in its mortgage offers, and there may still be action in the Courts from borrowers in due course.
Because they were unable to increase their SVR on existing mortgage contracts Nationwide, Lloyds TSB and Cheltenham & Gloucester have introduced a new SVR for all new mortgage contracts, with a rate of 3.99%. New borrowers, and existing borrowers choosing to effect a product transfer, will revert to this higher SVR but existing borrowers on SVR will continue to pay Bank Rate + 2%, currently 2.5%. However, Nationwide introduced this change a year ago and since then has offered some 1 year fixed rates. Therefore a few of its borrowers may be reverting to its higher SVR soon.
In addition to not following Bank Rate all the way down at least 16 lenders have increased their SVR since Bank Rate bottomed out at 0.5% in March 2009. The latest increases, from the beginning of this month, come from the Leeds and Buckinghamshire Building Societies. A list of current SVRs is attached to this report, both in rate and alphabetical order.
Why is now the time to start thinking about remortgaging?
Before the credit crunch borrowers strived to avoid being on their lender’s SVR, but now many feel comfortable sitting on the SVR, partly because if they were previously on a fixed rate they have probably reverted to a lower rate and partly because of the perceived difficulty of remortgaging in the current market.
However, remortgaging away from an SVR is now a much more viable option than it has been for over two years for the following reasons:
· No lender has cut its SVR for nearly a year but 16 have increased their SVR since Bank Rate fell to 0.5%.
· With 2 lenders having increased their SVR this month already borrowers paying SVR are much more likely to see their rate increase than decrease, even without a Bank Rate increase.
· House prices have recovered to an average of only 9.1% below their peak, according to Nationwide’s “real,” i.e. not seasonally adjusted, house price index.
· Borrowers with a 25 year repayment mortgage will have typically paid off 2% of their mortgage each year, thus improving their LTV further.
· The margin over Bank Rate of tracker mortgages has fallen over the last year, with rates starting around 2.5% (ignoring deals with big percentage fees, which have even lower rates).
· The cost of fixed rate mortgages has fallen sharply over the last few months, with 5 year fixed rates starting around 4% and at the cheapest level since 2003.
· The availability and pricing of mortgages at higher LTVs has improved significantly and so even remortgaging with an 85% LTV will be worthwhile for some borrowers.
· Nearly all borrowers on SVR will be free of early repayment charges (ERCs). A few of the building societies still charge interest to the end of the month and so borrowers with these lenders will need to time completion of their remortgage for the end of the month.
Who should consider remortgaging?
· Anyone paying an SVR of 3.5% or higher whose LTV is 85% or less, providing:
o They have no adverse credit.
o They don’t need to self certify their income.
Who shouldn’t consider remortgaging?
· Anyone who has reverted to Woolwich’s lifetime tracker rate of Bank Rate + 0.95%, who is paying Intelligent Finance’s SVR or the old SVRs of Nationwide, Cheltenham & Gloucester, Lloyds TSB (all 2.5%), Bank of Ireland or Bristol & West (both 2.99%), unless they want a fixed rate.
· Anyone with adverse credit, unless it is very minor, or who can’t prove their income.
Probably the most important consideration when remortgaging is whether to switch to another variable rate, in all probability a tracker, or a fixed rate. The attached tables indicate how much borrowers on different LTVs paying SVR to a selection of lenders, including all the majors with an SVR high enough to make remortgaging worth considering, could save per month and over 2 and 5 years, by switching to a lifetime tracker and after allowing for remortgage fees.
Lifetime tracker rates are very similar to the rates available on short term trackers and generally have similar or lower ERCs. Therefore for borrowers wanting to switch to another variable rate we would generally recommend a lifetime tracker.
The savings that can be made are now very impressive. At a time when the entire nation is being prepped for significant cuts in all areas of life, cutting what for most will be their largest single financial commitment just makes undeniable sense.
As an example for a remortgage fee of £1,499 someone with a £250,000 mortgage on Northern Rock’s SVR would save the following per month, based on current rates:
Up to 70% LTV: £396.
Up to 75% LTV: £333
Up to 80% LTV: £271.
Up to 85% LTV: £167.
Our calculations in the attached tables have been done on a like for like basis, i.e. switching from one variable rate to another, but some borrowers will prefer a fixed rate, in which case we would generally recommend a longer term fix, i.e. for 5 or 10 years. The initial monthly savings will be smaller switching to a fixed rate but many borrowers with LTVs up to 75% will find they can switch to a 5 year fix with little or no increase in their monthly payment.
Depending on LTV the initial interest rate differential between a 5 year fixed rate and a tracker will be in the region of 1.5% and between a 10 year fix and a tracker about 2.5%. A tracker will clearly be cheaper in the short term, whereas a 5 – 10 year fixed rate offers certainty of monthly payments for a reasonable period. A 2 or 3 year fixed rate looks less attractive as a remortgage option because it will be more expensive than a tracker and only offers certainty of monthly payments for a short period, whereas the further ahead one looks the more difficult it becomes to forecast interest rates.
Finally, some lenders offer product transfer deals to existing customers, either on the same terms as are offered for new customers or on different terms, which are sometimes better but more often worse than the generally available rates. Anyone considering remortgaging should check what their existing lender will offer, but borrowers with lenders who have increased their SVR for new customers, i.e. Nationwide, Cheltenham & Gloucester, Lloyds TSB, Bank of Ireland and Bristol & West, should bear in mind that if they remortgage or take a product transfer they will permanently lose the right to their current cheap SVR.
John Charcol strongly advises borrowers to seek detailed, independent mortgage advice on their own situation and find the very best product for them. Getting it right now will make the world of difference over the coming years.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.