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Over recent months, around 1.6 million borrowers in the UK have seen their mortgage payments rise. Large mortgage lenders including Santander, Halifax, Yorkshire Bank and the Co-Operative Bank have raised their ‘standard variable rates’ (SVRs) in 2012, pushing up the total cost of borrowing by an estimated £300 million.
However, while these moves may be unpopular with customers – and encourage high value mortgage customers to remortgage elsewhere – they are great business for the lenders.
Morgan Stanley has recently considered the impact of potential SVR changes amongst the UK’s large mortgage lenders. Its analysis, based on estimates of the number of SVR borrowers the largest lenders have, suggests that Lloyds Banking Group would have the most to gain from a further rate rise. This is despite the lender increasing the SVR for Halifax borrowers by 49 basis points in May 2012.
Morgan Stanley considered the number of SVR loans that the group could potentially move into a higher rate. While this runs into thousands of high value mortgage customers, it doesn’t include those borrowers benefiting from Cheltenham and Gloucester’s capped SVR at 2.5 per cent – one of the lowest in the UK.
The research estimates suggest that an SVR hike of 0.5 percentage points would lead to an 18 per cent increase in group operating profits. Other lenders would also boost their profits with an SVR rise. Nationwide Building Society, which also has a large proportion of borrowers on a capped SVR at 2.5 per cent, would see an estimated 4 per cent boost to its operating profit if it increased the variable rate for other borrowers by 50 basis points.
Morgan Stanley predicts that many lenders will increase their SVRs by 25 basis points in 2013. However, despite the potential for increased profits, there are risks of hiking rates.
Mortgage Strategy reports that ‘the Morgan Stanley research suggests that there may be some negative fallout from the SVR rises.’ One such danger is ‘adverse selection’. This is where high value mortgage customers with substantial equity and a good credit history decide to react against an SVR rise by remortgaging to another lender.
Islay Robinson, CEO of London mortgage broker Enness Private Clients, explains that this can have an overall negative effect for lenders. He said: “If an SVR rise leads to lots of high net worth mortgage customers remortgaging to another lender, it leaves the existing bank or building society with a lower quality lending book. This is because they are left with an increasing proportion of borrowers who cannot remortgage and who present a greater risk.
“The rise in these borrowers’ payments from an SVR hike could then lead to higher levels of arrears and losses on lenders’ books.” In addition, SVR rises in 2013 will, according to Morgan Stanley, present a risk to the wider economy. It will reduce disposable income from households already struggling with rising prices and depress activity in the housing market.
Mr Robinson, the London mortgage advisor, added: “The government will be hoping that their Funding for Lending scheme is a success, as cheap funding for banks and mutuals may be the only way that they can keep their SVRs at the current level. If the scheme doesn’t work, we may be set for another round of SVR hikes from the large mortgage lenders in 2013.”