Why has Santander launched a new reversion rate?

Posted on 18 January 2018 by Ray Boulger

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Santander has announced that it is cutting its revert to rate by 0.99% for all new mortgages from 23 January 2018, a decision that is said to have been made as a result of consumer research.

The new rate, Bank Rate + 3.25% (meaning it will initially be 3.75%) takes Santander’s revert to rate about 0.25% below its peer group

A lower revert to rate is obviously good news for anyone taking out a new mortgage with the lender. But it’s important to remember that the majority of borrowers will, at the end of their fixed mortgage term, be able to switch to a lower rate with their existing lender or remortgage to a new provider.

I presume that Santander didn’t spend too much time on the consumer research that supported this decision, asking whether, at the end of your preferential rate, you would rather revert to a rate of…

  • 3.75% - which changes only when Bank Rate changes

or

  • 4.74% - which could in theory change whenever Santander decided (although in practice Financial Conduct Authority (FCA) oversight would restrict its ability to significantly widen the margin over Bank Rate)

So what’s really behind this decision? To answer this you have to look at how the new rate positions Santander against its competition. The new rate means that Santander is now around 0.25% lower than its peers, rather than 0.75% above as it had been with its old SVR. Santander has struggled in the past to boost its net lending figures, despite decent market volumes of gross lending and an active product transfer strategy. I suspect part of the reason for this struggle has been its high SVR, which increases the proportion of its borrowers who chose to remortgage and switch to another provider.

Santander has clearly introduced the new reversion rate in a bid to attract extra new business. This begs the question - what happens to its existing borrowers when their preferential rate ends and they move over to the old SVR? This leaves me questioning:

  • Why make this change now? Bearing in mind Santander’s SVR has been about 0.75% above its peer group for many years?
  • Why didn’t they cut their SVR for all customers?

I suspect that a key factor in this decision was the Prudential Regulation Authority’s (PRA) move last year that required lenders to assess affordability at 3% above their revert to rate rather than the previous requirement to base it on a 3% increase in Bank Rate. The latter allowed lenders more flexibility on the basis that their SVR could increase by less than the Bank of England’s base rate.

By changing its follow-on rate for new borrowers, Santander can now use a rate of 6.75% in its affordability calculation instead of its previous 7.74%.

Most lenders believed the old PRA rule was too onerous and Santander isn’t the only lender to change its revert to rate in the light of the new PRA rule. An alternative approach for other lenders with a high SVRs is to offer a discount off SVRs, until the end of the 5-year term relevant for this rule.

This highlights a problem with the current PRA policy. When the Bank of England increased the base rate by 0.25% two months ago, many lenders increased their SVR. This immediately impacted the rate they have to use for the affordability calculation, despite having no evidence that the PRA expects interest rates to peak any higher now than it did before the base rate increase. As long as the PRA retains this rule in its current form, every time there is a Bank Rate change it should review whether it considers a 3% margin is still appropriate?

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Categories: Bank of England, Interest rates

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