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Lenders may have to link SVR to base rate under European rules

A proposal in the European mortgage directive could force lenders to align their variable rates with some form of reference rate, such as the Bank of England base rate.

Yesterday, the European Monetary and Economic Affairs committee – ECON – voted through a number of draft proposals.

The proposals state that where the credit agreement is a variable rate loan; Member states shall ensure that any index or reference rate used to calculate the borrowing rate is clear, accessible, objective and verifiable by the parties to the credit agreement and the competent authorities.

This has been interpreted by some as meaning lenders would no longer be able to hike their SVR without clear justification and would need to link it to some form of external reference rate.

The proposals also state that where a credit agreement unconditionally allows variations on the interest rate that are based on external factors, the underlying data for the calculation of the interest rate has to be available for at least 14 years.

The Council of Mortgage Lenders says it is still dissecting the directive and is seeking clarification on whether the proposal means lenders will need to change the way they calculate their SVR.

A CML spokeswoman says it needs to clarify whether the proposal only relates to those lenders that currently calculate their SVR based on a reference rate or whether the directive is proposing that all lenders need to calculate their rate this way.


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  • Lorna Bourke 9th June 2012 at 12:30 pm

    A requirement for all lenders to link mortgage rates to something like Bank Base Rate would inevitably mean that mortgages would become more expensive. Lenders would lose flexibility and would build in a margin to ensure that in times of difficulty like the current credit crunch, they were still able to make a profit even though default rates on loans rise and the cost of funds becomes detached from BBR – as now. While it is important that borrowers know what the SVR is going to be, to give no flexibility to lenders to increase the rate if required would be a retrograde step and is unlikely to benefit borrowers – for the reasons above.

  • Peter McSparron-Edwards 8th June 2012 at 3:25 pm

    There remains the confusion that lenders can link their rates to the BoE base rate. Lenders have to lend at a rate which exceeds their cost of funds which is not directly linked to base rate – its linked to the rates on the money market and/or to the rate paid to savers to attract / retain their funds. A rate paid to a saver of say 3.4% can’t result in a mortgage rate of base + 2%. If SVR has to be linked then there seem to be two alternatives – base plus a large margin on mortgages (to get to current SVR levels) or base less a margin on savings. I can’t see anyone supporting a cut in savings rates.

  • Stuart 8th June 2012 at 12:56 pm

    This is tremendous news for Individuals, and the Economy too.
    As it stands the actions being taken by the BoE and Government are being undermined by banks who hike their SVRs with very little notice, and no clear justification.Many mortgage customers have seen SVRs rise by 25-40% this year increasing their outgoings (in many instances)by thousands of pounds a year. We all appreciate that banks need to recapitalise but not at the double expense of the public. We will one day pay for QE (and the only people to benefit from this so far are the banks who have squirreled the money away), so we dont need to be hit with high SVR’s as well. The sooner this is implemented the sooner, I believe, the economy will truely recover as the public will have a greater bility to budget, and as a consequence they will eventually start to spend again. As I keep reiterating this is essential for the national recovery. Lets hope it happens very soon.

  • Ian Windsor-Smith 8th June 2012 at 12:50 pm

    This will help simplify the system and make it clearer what a racket lenders base rates are. Will it stop the high street profit grabbers? Doubt It, they’ll find another method of deception.

  • Ancient Wisdom - is a mortgage broker in N3 8th June 2012 at 12:21 pm

    Lets hope this happens – then that way mortgage lenders can stop abusing borrowers stuck on SVR’s.

  • Ancient Wisdom - is a mortgage broker in N3 8th June 2012 at 12:20 pm

    Lest hope this happens – then taht way mortgage lenders can stop abusing borrowers stuck on SVR’s.