Which? has warned that many people with Standard Variable Rate (SVR) mortgages will face financial difficulty when interest rates rise.
A lender’s SVR is the interest rate that a mortgage moves on to after an introductory deal has come to an end. Around 40% of homeowners are currently paying their lender’s SVR.
Rate cuts
New research by Which? Money shows that 95% of mortgage lenders failed to fully pass on the cuts in Bank of England Base Rate we have seen over the past three years. The average SVR is now 3.48% above Bank of England Base Rate (0.5%), compared with 1.95% in September 2008.
In fact according to Which? 20% of mortgage lenders have actually increased their SVR since interest rates hit 0.5% in March 2009.
The only mortgage lenders to pass on the rate cuts in full were Cheltenham & Gloucester and Lloyds TSB.
Customers of the KRBS (Kent Reliance Building Society) currently pay the highest SVR at 6.08%, more than 30 times the Bank of England’s base rate.
Trap
As house prices have fallen and the levels of equity in people’s home squeezed many mortgage holders are trapped on their lenders SVR and unable to remortgage onto a more competitive deal.
When interest rates start to rise, as most experts and the Bank of England believe will happen, those trapped on their mortgage lender’s SVR may struggle financially.
A 1% rise in interest rates would increase the monthly repayments on a 23 year capital repayment mortgage by £60 per month. If the same mortgage were on an interest only basis the monthly payments would increase by £84 per month.
Margins
The Council of Mortgage lenders argue that a lender’s SVR is more closely linked to the ability of a bank or building society to attract savers rather than the Bank of England Base Rate. However, it is clear that lenders have increased their margins since the financial crisis in an attempt to repair their balance sheets.
Michael Coogan, director general of the Council of Mortgage Lenders said, “I think what we have is the banks and the building societies trying to restabilise the system which was in shock in 2008.”
“They are trying to recapitalise their organisations, deal with past losses, deal with the risk of future losses, and at the same time keep their customers as happy as possible through the economic cycle.”
