Smith is sales operations director at First Complete
As we get closer to an interest rate rise, it raises the question of what link is there now between the Bank of England Base Rate (BBR) and lenders’ interest rates, be they SVR or initial rates? Once upon a time they were firmly linked but now lenders’ SVRs are based much more on the money markets and LIBOR.
As this is so, it could well be that there will be very little effect on borrowers as and when the interest rates actually do rise. Indeed, if the first rate rise is only 0.25% as it is widely touted to be, it could be that it would cost some lenders more to increase rates than they would actually make from the rise so some lenders may well choose to leave their rates the same after the first base rate rise.
Who raises their rates or not may well depend on what their SVR is to start off with. Lenders with very low SVRs at the moment are likely to have more reason to raise rates than say many of the building societies which have weathered the credit crunch by keeping their SVRs several percentage points higher.
Historically lenders increased their SVR and tracker rates immediately and sharply when BBR rose often exceeding the amount of the actual BBR increase, whereas when base rate fell it was almost standard practice to give borrower’s a month’s notice of any fall in their payment rate.
There are many people of course who will not be affected by any rise in the short to medium term. The talk of rates rising has already had the effect that over 80% of all new mortgages are taken out on fixed rates; surely an unprecedented amount.
The interesting angle will be the effect on the remortgage market. Many lenders have been struggling with remortgages since the MMR as illustrated by the 24% drop in remortgaging in the latest CML figures. Typically a rise in rates would instigate a flurry of remortgages, putting yet more pressure on lenders, but there are those who are not on fixed rates who may well find that they become mortgage prisoners. There should be no problem for a standard person in full time employment who has a repayment mortgage, those who may encounter problems are likely to be those on an interest only mortgage who want to remortgage onto another interest only; or those who are self employed or find that they no longer meet MMR compliant affordability criteria.
Brokers could play a valuable part here before rates actually rise by segmenting their customer base and putting a customer contact strategy in place, especially for those who are likely to suffer financial stress when interest rates rise. These will typically be first time buyers or people who have taken out a mortgage in the last five years since BBR has been static. It may also comprise landlords who took out their buy-to-let mortgages when qualifying rental multiples were only 100% of mortgage payments.
One more interesting observation will be: how many current bank staff will actually know what the process is when base rate rises? It’s been seven years since the last rate rise and many of the staff from that time will have moved on. Just how many bank staff will have the expertise to know what to do when? It will certainly keep things interesting!