So where’s the tsunami?

Some lenders have increased their SVR in recent months. Peter Mayor, head of remortgage at Optima Legal, looks at what this means for the remortgage market

The mortgage market is an interesting, exciting and unpredictable place to be. We are in unchartered waters with barely a day passing by without some news breaking that affects the market. Times of adversity bring change and change presents opportunity and unpredictability because no one for sure knows how or when it will all end.

It is hoped that the markets will eventually settle and that those who can influence events, most notably in Europe, will do so, and that lasting solutions will be found. But will they? And what are the consequences if they do not?

I read an article recently where Charles Dallara, the International Institute of Finance chief was quoted as saying that the damage to the rest of Europe from a Greek exit would be ‘somewhere between catastrophic and Armageddon’. It’s unlikely that will be allowed to happen. Agreement to provide support directly to European banks provides testimony to that, however, the possibility of such a calamity is clearly on people,s minds.

Increasing SVRs

Until recently, lenders have been steadily increasing their standard variable rate (SVR) despite a prolonged period where the Base Rate has been held at a record low. Banks are under pressure to hold cash, lots of it and for several reasons. Banks need cash to rebuild their balance sheets after years of writing off underperforming loans.

The regulatory environment also requires more cash to be held to buffer against any future events, and the banking crisis and the Eurozone crisis have also meant that banks are now seen as riskier and less attractive investments from outside capital. Recent downgrades by the credit rating agencies, only exacerbates this point.

All these factors squeeze the availability of money and as a result push up the cost of funds. So increasing SVRs satisfies a number of key lender requirements - reducing demand and therefore the amount lenders have to lend, and increasing margins which helps to build up reserves to boost capital.

What about customer demand?

Historically, mortgage rates have been closely linked to the Base Rate. At the beginning of last year there was talk of a ‘tsunami’ of people remortgaging away from their SVR to the safer ground of a fixed rate product expecting the Base Rate to increase. As we moved through 2011, and now through 2012, the economic outlook suggests that any imminent increase in Base Rate is unlikely, there is even talk of a further cut to Base Rate if the ‘Funding for Lending Scheme’ fails to deliver the expected increase in lending. However, what we have seen for the reasons described above is lenders steadily increasing their SVR independent of the Base Rate. Yet there has been no ‘tsunami’.

Increases in SVRs to date have been relatively small (the highest profile lender rate rise was from the Halifax back on 1 May) leading to the assumption that customers remain happy to retain the flexibility of an SVR rather than moving to a tied product - customers are also much more aware and cautious regarding products and future interest rate changes.

Customers’ motivation to remortgage has changed; in the past, releasing equity to spend on holidays, cars or home improvements was a key motivator. We are now in a completely different environment where motivation is driven more by the need or desire to secure reduced or certainty of mortgage payments.

It is also true to say that whilst there are some attractive products available, HSBC’s lowest ever five-year fix being a good example, the number and choice is much reduced from 12 months ago. Lenders’ attitude to risk has understandably changed with underwriting criteria either being tightened or more rigorously enforced making it harder for people to secure the mortgage they may want.

Lenders are also planning for and implementing the requirements of the Mortgage Market Review which is also affecting the availability of mortgages. MMR is of course aimed at preventing the return of risky and irresponsible lending evident at the height of the lending boom. There is, however, an argument that the market has self regulated, and most, if not all of what may have been considered irresponsible practices have disappeared.

Where will it end?

Interestingly, whilst the banks remain focused on meeting their capital adequacy requirements and rebuilding their balance sheets, building societies and other mutuals reported a 36 per cent increase in gross mortgage lending during the first four months of 2012, compared to the same period in 2011, demonstrating that the mutual sector is taking advantage of its competitive position and growing market share.

So where will it end? The answer of course is unknown. There are still too many issues to be worked through and resolved before the current instability can ease. The only certainty appears to be uncertainty. The lending market will not return to any sense of normality for some time to come, despite growing pressure from both the US and UK for Europe to sort itself out.

Inevitably, both banks and building societies will continue to lend albeit at current levels for sometime, with a greater appreciation of risk in mind. Customer demand will also remain subdued until such time as confidence in the future picks up pace. Certainly, in the current climate a ‘tsunami’ of remortgage applications seems a long way off.