Lenders’ SVRs have come under fire, with some critics condemning the rates as an ‘inertia tax’ that harms consumers, although others have stepped in to defend the charge.
Last week online mortgage broker Trussle published research stating that the big six lenders were penalising borrowers who came off two-year fixed rates by imposing average rate increases of 2.5 per cent.
This adds up to an extra £3,242 a year for borrowers with Barclays, HSBC, Lloyds, Nationwide, RBS and Santander, which collectively serve 69 per cent of the market.
Trussle slammed the extra cost as an “inertia tax” on consumers.
Trussle chief executive Ishaan Malhi says the firm’s research highlights “the need for the mortgage sector to better educate borrowers and simplify a raft of unfair practices”.
He adds: “The industry, its regulators and the UK government can address these challenges by working together.
“Potential solutions could be to agree a reasonable upper limit on SVRs, and a system where lenders are not only obliged to warn their mortgage customers well in advance of their fixed rate coming to an end, but also to confirm receipt of this notification.”
Malhi is supported by HomeOwners Alliance chief executive Paula Higgins, who says: “There is an onus on lenders to not take advantage of homeowners’ switching inertia and instead look to foster an active ongoing client relationship. This includes making greater efforts to alert their customers to more suitable deals and the financial benefits of remortgaging at the right time.”
But lenders stepped in to defend the SVR status quo.
A Council of Mortgage Lenders spokesman says: “Lenders write to their customers in advance of any impending rate change, and this provides a trigger for borrowers who do not want to move on to a standard variable rate.
“Some lenders proactively offer their customers another discounted rate before they are due to move on to the SVR. Where borrowers do not take up this option, it is often because they prefer to remortgage instead.”
An RBS spokesman says only 11-12 per cent of the lender’s customers are on SVRs, and it actively writes to customers to alert them of their term’s end and help them if they have payment difficulties.
An HSBC spokesman says: “The fact that SVR rates are typically higher than fixed rates isn’t new, and we regularly publicise our research in this area, highlighting the potential savings customers could make by moving off an SVR onto a fixed rate deal.”
But brokers say the reality of whether SVRs are good or bad for consumers is nuanced.
London & Country Mortgages director Pat Bunton says SVRs tend to favour lenders, not consumers, but the main issue is whether borrowers are trapped.
He says: “For a customer to be trapped and sit still, especially on an SVR, one has to ask: whose interest is that in? Is it in the customer’s interests or the lender’s?
“You’ve got on the one hand people who are free to move and get better deals, and on the other hand you’ve got people who can’t and are trapped.”
Bunton adds that brokers have a role to play in better educating their customers about SVRs.
He says: “Their responsibility is to make sure that, when their customer gets towards the end of their product period, they actively engage with them to see if it is in their interests to move to a better deal.”
John Charcol senior technical manager Ray Boulger says many borrowers may choose to be on an SVR, such as Nationwide customers who are still on old deals that reverted to base rate plus 2 per cent.
He says: “If you’re paying 2.25 per cent on what is effectively a tracker rate with no early repayment charges, you’re probably not going to be in any rush to switch to a fixed rate.”
Some consumers may choose SVRs because their terms could run out with little left to repay on their mortgage and they want to avoid the “cost or bother” of remortgaging, he adds.
Bank of England figures show a widening gap between fixed rates and SVRs (see graph, below), suggesting lenders may have an incentive to let borrowers fall onto the more expensive rates.
But Boulger says too much can be read into Bank of England averages, which is misleading. For example, many big lenders have SVRs of around 3-4 per cent, while building societies tend towards SVRs of more than 5 per cent, skewing the averages.