The Dangers of SVR’s (Standard Variable Rate) Mortgages

by Mark Alexander

16:21 PM, 23rd January 2012
About 9 years ago

The Dangers of SVR’s (Standard Variable Rate) Mortgages

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The Dangers of SVR’s (Standard Variable Rate) Mortgages

Ever since I got into this business I have avoided SVR (Standard Variable Rate) mortgages or discounted/fixed rate mortgage products that revert to an SVR like the plague. Now I’m not talking about bank base rate trackers or LIBOR rates, they are fine. I prefer bank base rate trackers myself but that’s another story and I’m rambling now so I will move on.

The SVRs that make the hairs on the back of my neck stand up are those which lenders will tell you they set based on “market forces”. The lenders will have you believe they will always be competitive in their pricing on the basis that it would affect their market share if they weren’t.

But what if they wanted to get out of a certain market? Where’s their incentive to price competitively then? What if you couldn’t refinance at that point, say because your earnings or credit status had changed or your property had fallen in value?

What levels of rates do you think the likes of Mortgage Express, Irish Permanent, GMAC or Capital Homeloans would be charging today if they were not contractually tied into providing your mortgage at bank base rate or LIBOR plus a fixed margin of X?

I’ve decided to write about this as I want to remortgage one of my properties to do another deal. My instructions to my broker was that I wanted the best fixed or discounted rate which reverts to a bank base rate tracker. The response was, “the majority of  lenders currently revert to SVR based products, there are lenders which will lend to portfolio landlords, but based on your current exposure levels to them, there are no suitable options“.

So my choice is, accept an SVR reversion rate or do nothing. I could go commercial but that would entail committing to a capital repayment mortgage and that would mess up my cashflow. If I was a newbie, amateur landlord there would be a few products available to me but I’m not. I’m an established priofessional landlord.

The mind boggles!

It makes me realise that the banking world is still as barmy as it ever was! Why would lenders make more products available to newbies over and above those available to a portfolio landlord?

This is turning into a bit of a rant isn’t it?

Oh well, in for a penny and all that …….

SVR Mortgage Reversion Terms – The Rant Continues

To finish my story about refinancing before I move on, the bottom line is I’ll not be doing it and I will miss out on doing another deal for now. That’s how strongly I feel about this.

Of course, if you trust bankers there’s no problem is there?  Your mortgage lenders would never increase your standard variable mortgage rate at a point where it is impossible for you to refinance would they?

Well I know different!

I know a chap who refinanced his own home with Bank of Scotland to pay out a divorce settlement about five years ago. Since then his financial position has changed and his house has fallen in value. He remortgaged to the max at the time so he now has very little equity. Even if just one of these two things had occurred he wouldn’t have been able to refinance today. Issue one being income based criteria, issue two being that he couldn’t get the LTV (Loan To Value) he needed.

His mortgage started out as a discounted base rate tracker for the first couple of years and when base rates fell sharply he was laughing all the way to the bank. However, his mortgage has now reverted to the contracted SVR and he’s paying nearly 5%. If at the time of remortgaging with this very same lender he had chosen their lifetime base rate tracker he’d be paying less than 2% now. The banks publicised SVR rate for new borrowers is also substantially lower than he’s paying so what’s the banks justification for charging him more do you think?

Thank banks answer – RISK!

Plain and simple. He can’t argue that can he? He can’t refinance because his LTV is higher than when he took the mortgage and his income is lower. Of course it’s a greater risk now, however, if he’d have elected for the lifetime base rate tracker deal at the time of remortgaging he’d still be on that rate and the risk to the bank would be no different.

So you have been warned, avoid mortgage deals that revert to SVR (Standard Variable Rate) like the plague, unless of course you can absolutely guarantee that your personal circumstances, financial circumstances and the value of your property will never deteriorate. And even if you could guarantee that, which of course you can’t, that will still leave you having to trust bankers.

By the way, this isn’t a new method of profiteering the banks have just discovered. They were stitching people up on SVR’s when I got into this business in 1989 and probably well before that.

RANT OVER!

Your thoughts please?


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Comments

22:43 PM, 24th January 2012
About 9 years ago

There we have it straight from the horses mouth you don't want the best product for the client you want continual product churn for all those juicy commisions and following trail commissions.

22:46 PM, 24th January 2012
About 9 years ago

I remember doing my own mortgage research before I spoke to David Hollingworth at L & C.
His result was the same as mine.
Perhaps I should have become a mortgage broker!!!!!!!?

9:06 AM, 25th January 2012
About 9 years ago

Haha  oh dear Mr Barrett, have you always been a cynical, suspicious, self indulgent, up your own 'arris type of bloke, or is this a recent development?

Certainly someone of your own calibre would indeed only consider lifetime ongoing help, advice and support as "continual product churn for all those juicy commisions and following trail commissions." whereas the very many people who I have helped (without having to advertise as my business has ONLY grown on recommendation over 20 years - can you say the same for yours?) have been very happy with the regular reviews on their financial planning matters.

Indeed, to take one case - out of thousands - as an example (I could, of course give more, but I won't take up this forum too much 🙂  ), I met with an existing client to review a mortgage (no fee charged for the initial set up or the review) only to tell him that I had fully researched the market and that the reversionary SVR which he was about to move on to could not be beaten.  He asked me why I had travelled on a 120 mile round trip to tell him that I couldn't help.  My answer is simple - I provide an advice and recommendation service (note, not a salesy "continual product churn") and that my service includes regular reviews to help my Clients maintain peace of mind that they are a) utilising the right financial products and b) they can trust me to give advice now and in the future.

He was happy with the service and indeed recommended me to two other people, who happened to be two very successful businessmen and I have now been instructed to provide advice and servcies to them too, so ultimately my investment into the research, the trip there and back, the time spent with my Client (for no apparent immediate 'reward'/income) and the provision of my professional service has indeed profited my business, in various ways including a) maintaining an honest and trusted relationship with my Clients and b) an investment with a fair return.

And I am not alone by any means.  The vast majority of professional financial advisers and mortgage brokers who I know (and across our 'industry') are just like me.

Mr Barrett, you gloat at meeting Mr Hollingworth's product selection for you, but L&C's industry position also means that they - just like many of us independent and whole of market brokers - not only can source deals, but we successfully get them through too, whereas many a 'direct' application has subsequently turned to us for help as they didn't realise the efforts required in dealing with the very many third parties involved and how to piece together the various requirements to aid a speedy conclusion.  Yes, continue to use moneysavingexpert or moneysupermarket or comparethelatestfurryanimal, and be it on your own head when you ultimately need help for your latest c0ck-up.

Mr Barrett, shame on you for your naive, insolent comments.

Mark Alexander

9:30 AM, 25th January 2012
About 9 years ago

To Paul Barrett and Greyhairedmortgagebroker

Interesting perspectives from both sides gentlemen and thank you for sharing them. Please don't allow this to get personal though. Remember, every comment made on Property118.com is moderated so let's keep it professional please.

16:14 PM, 25th January 2012
About 9 years ago

Let's see what happens to your business when you are no longer allowed to charge commission but must charge fees at the end of this year.
I would conjecture your business will be off a cliff edge.
Hope not for your sake.
People however are resistant to the idea of paying up front for advice and so many won't.

20:46 PM, 25th January 2012
About 9 years ago

Mr Barrett, please! Your ignorance of the financial services business is stunning!  The issue of not being able to receive commissions is ONLY for IFA's who advise on pensions and investments.  For Advisers who work in the mortgage and protection arena, there is NO change.
 
Thank you for your concern, though.  Much appreciated!
 
You are clearly not a professional (yes, I read your other comments in other forum pages too!) so why not simply acknowledge that there are (many) others far more qualified, experienced and knowledgeable who can comment on such important issues and why not take time to sit back, read and learn?
 
Mark, this is not a personal attack on the uneducated Mr Barrett, just helpful advice and recommendations (for which I will not charge a fee!).
 

23:01 PM, 25th January 2012
About 9 years ago

Fact is I would only use a broker who would not charge me fees.
If you do not charge fees as you get paid by the mortgage company then yes I would use your services.
Of course I am not a business professional.
Educated not sure about that but I do know when I am being ripped off which is why I always carry out due diligence.
If it turns out that my caution was not necessary then happy days and I would use that brokers or advisors services.
I think the phrase' caveat emptor applies'
Surely any sensible consumer would adopt such a strategy and not believe anything one is told by a salesman/advisor until confirmation of the advice has occurred.
That is the way I have always lived my life and I am not going to change my way of doing things any time soon.
Inevitably that means not using commisssion charging mortgage brokers.
Life is all about choices and presently I choose to continue in the fashion I always have.
I don't believe you could teach me anything I need to know as I have very simple financial circumstances and consequenty an advisor for me is an expensive luxury that actually is of no use to me.
I hope the mortgage business goes aswell as it has done but I think you will struggle with income from mortgage commission as the market fro normal people is severely constrained.
Obviously if you deal with high net worth individuals then you are in a good place.
All power to you.
I think in general though the amount of advisors will substantially reduce in a years time.
This could obviously be good news possibly for you.
I just think the market has changed drastically from what it has been over the previous years.
Of course on of the major income losses for mortgage brokers could be the introduction of EU regulation of BTL mortgages..
It has been BTL mortgages that have been a driver odf income for lenders and brokers.
Unless some workaround may be arrived at for this stupid regulation then a lot of people in the industry are going to be stuffed!!!
I have yet to see any contradiction of ANY information I may have imparted on forums except the end of year issue with commision payments fo advisors of certain products.

9:20 AM, 28th January 2012
About 9 years ago

interesting thought - would it not be prudent to take advice from
someone who is walking the walk, rather than just talking the talk.
We learn from experience ! 

Mark Alexander

9:28 AM, 28th January 2012
About 9 years ago

What's your definition of walking the walk Martin? From my understanding of the people who have already commented, they own hundreds of properties between them. Does that not satisfy your criteria for "walking the walk"?

Alan bus

11:43 AM, 28th January 2012
About 9 years ago

Hi I am in no way in the "big league" within the rental market. I was given a sum of money that allowed me to buy a house out right. At the time I was living in a council flat which I had purchased under the right to buy act. I moved into my house & then let out the flat, this was about 8 years ago. 5 years ago I decided to take out a mortgage on my house to fund the purchase of another flat. At the moment I pay 3.45% on my old flat & 3.99% on my last one. The reason for my involvement in the rental market is to fund my "old age" as there will be little help from the goverment in that dept. I tried to get a new mortgage about 2 years ago as I wanted to buy a house and sell 1 of the flats due to the service charge, the amount I needed was £15k they said "no you dont earn enough" The thing I dont understand is that I would have thought a house was a safer bet for the bank as it was freehold not leasehold. The house price was £160k the total mortgage on the new house would have been £56k. All my mortgages are repayment ones as I like to know that they will be paid for and can leave them to my son when my time is done!!!

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