With the U.K. base interest rate at a record low of 0.5%, many mortgage payers have given up chasing special deals and have reverted to their lenders’ standard variable rates (SVR). However, the Halifax is raising the cap on its SVR from April 2012. Does this signal the beginning of a move by other lenders to raise their SVRs?
The Halifax will increase the cap on its SVR from 3% above base rate to 3.75% above base rate from April 2012, although the actual SVR will remain unchanged. Currently, only 40,000 borrowers are affected by the change. But, with an estimated 1 million Halifax borrowers currently on its SVR, it can only be a matter of time before further changes are made.
The Halifax differs from most major lenders because its terms and condition allow it to change its SVR cap simply by giving borrowers one month’s notice of the change. Affected borrowers can repay their mortgage within 3 months without incurring early redemption penalties. Other major lenders with capped SVRs, Lloyds TSB/C&G and Nationwide, have no clause in their contracts allowing a similar change. A large number of their existing borrowers are enjoying a capped SVR of 2.5%, although new borrowers and those who have transferred to a new product have a new “revert to” rate of 3.99%.
Halifax recently brought in a new Homeowner Variable Rate of 3.99% for new mortgages. It seems likely that, over the coming months, it will bring its SVR in to line with this new rate. It is highly unlikely that the Halifax would risk the adverse publicity from the change in the capped rate simply to leave rates unchanged or to raise the SVR for a relatively low number of borrowers.
Impact on Borrowers:
The weak economy, combined with lenders reluctance to extend credit, means that borrowers affected by a change in the Halifax SVR may struggle to find an alternative source of finance. They could be stuck with higher monthly payments. On a £150,000 interest-only mortgage, a rise from 3.5% to 3.99% would equate to an additional £735 per year in mortgage payments. The knock-on effect is that affected borrowers would, at the very least, have less disposable income. Some borrowers, already under pressure in the current economy, may struggle to maintain their mortgage payments, leading to a potential increase in repossessions.
Impact on Other Lenders:
When considering whether the Halifax is leading the charge for other lenders to raise their SVRs, it is worth noting that most other mortgage companies do not have the flexibility to make such a change, due to the terms of their mortgage contracts. In addition, most major lenders currently have an SVR lying between 3.89% and 4.24%. It is likely that the Halifax’s increase in its SVR cap will simply allow it to bring its SVR in to line with other lenders’ current rates. This makes it unlikely that we will see a surge in SVRs until the base rate begins to increase. Financial analysts predict that the base rate will remain low for at least another 2 years.
The borrowers most at risk of SVR rises are those whose lenders are no longer lending to new customers or whose mortgages are sold to another company. This is exemplified by the Bank of Scotland’s move to an SVR of 4.95%. Bank of Scotland is now part of the Lloyds Banking Group and no new mortgages are being issued under this brand.
In Summary:
While the Halifax’s increase in its SVR cap is potentially bad news for its current borrowers, it is unlikely to signify a trend across the board.
Guest post contributed by freelance finance writer Elizabeth Goldman on behalf of Everest FX where you can learn forex and read about different forex strategies. The views and opinions expressed are of the writer and do not necessarily represent those held by Everest FX or Countingpips.com
