Brokers could win from hike in SVRs

18 January 2010

We are starting to see evidence of mutuals pushing up their SVRs. While many commentators refer to the Bank of England base rate as static at 0.5% and can’t understand this trend it is likely to be the norm over the next 12 months.

The fact is that a low base rate will force many banks and building societies to increase their rates.

If that sounds counterintuitive here’s the reason. In a normal market banks and societies’ savings books make a profit by paying savers less than base rate.

On a base of 5% I would expect a society to pay a blended average rate of 3% to its savers, giving it a positive spread of 2%. With base rate at anything less than 2% this model starts to break down and with base rate at 0.5% it is damaging profitability for those organisations that take deposits.

For the past 18 months savings books have been loss-making and to add insult to injury there has been fierce competition for retail deposits, pushing the cost of retail deposits even higher.

Right now, instead of a positive 2% spread I estimate there is a negative 2% spread. This is the reason that some lenders are being forced to put their SVRs up. The old saying that every cloud has a silver lining comes to mind in this instance.

If there’s one thing that will bring a remortgage market back it’s reversion rates or SVRs higher than new business pricing. Brokers could be the inadvertent winners from a hike in SVRs.

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