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?

Comments

Mark Alexander

11:51 AM, 28th January 2012
About 9 years ago

It may be possible for you to transfer your existing mortgage to another property. Speak to your existing lender to see if your mortgage is "portable". Some lenders will consider an application for you on the basis that you already own three properties including your own home. The amount you are looking to borrow is low risk too. Have you tried The Mortgage Works? They are a subsidiary of Nationwide Building Society. They take a flexible approach to situations like yours. If you need a good broker I will be very pleased to introduce you to the chap who advises me. My email address is mark@property118.com Alternatively you could try our Directory, it's in our header bar. It is free to use and you can private message your enquiry to up to six brokers at a time.

Alan bus

12:00 PM, 28th January 2012
About 9 years ago

Thank you Mark for the prompt reply. I was told that my mortgage is portable & that the "top up" would count as a seperate mortgage. Thank you for you advice I will look into it.  

Mark Alexander

12:11 PM, 28th January 2012
About 9 years ago

You are very welcome. Please note that I am not regulated to give financial advice though so you can't sue me if it all goes wrong. I do recommend that you speak to a qualified and practicing advisor who has professional indemnity for your own protection.

13:35 PM, 28th January 2012
About 9 years ago

My experience has been the opposite. I tried to source a deal for 2 members of a property group I formed, and I found it difficult to get 80% mortgages for them as they were 1st time landlords. One already had a residential mortgage and he eventually qualified for an 80% BTL mortgage. The other was also a first time buyer so he qualified for 90% residential mortgage. So it ended happily.

13:45 PM, 28th January 2012
About 9 years ago

I took out a 75% BTL mortgage at 5.29% in May 2009 and I was paying £324 per month. From June 2011, it reverted to the SVR of 2.5% and now I'm paying a mere £199. I took out another BTL mortgage a year later but at 6.24% for 3 years and paying 266. So, from April next year, I'll be paying around £160.

I tried to get another mortgage like these 2 but I was told that the reversion rate is now 4.84%. So, I went elsewhere as their initial rate was too high and the reversion rate was similar.

At least I got 2 cheap mortgages. The good old days are gone.

Mark Alexander

14:00 PM, 28th January 2012
About 9 years ago

Kasim, the purpose of my article was to identify that at least two types are SVR can be offered. The dangerous ones in my opinion are those where the lender can decide at a whim to change the rate to anything they like. It would appear that your latest two mortgages fit this criteria. The other type of SVR is when the rate tracks an independently controlled index such as Bank Base rate or LIBOR plus a fixed margin. These were far more prevelent pre credit crunch and I suspect that's why you are experiencing lower payments on your first two mortgages. If and when you shop around for a new mortgage you now know to ask the question "how is the eversionary rate calculated". If the answer is that the lender sets the rate based on market forces then you know to be cautious and consider what other options are available to you.

16:15 PM, 28th January 2012
About 9 years ago

meaning -i would take mortgage advice from someone who owns properties and be wary of taking advice from an adviser who doesn't actually own any rental property themselves.

19:34 PM, 28th January 2012
About 9 years ago

When first started playing them property game I mainly dealt with Morgage express I think I'm 1.75% above base and one is lifetime tracker 0.69 above base( pension sorted) I'm 35 now been in this game for 9 years all my property's apart from the one above are intrest only I'm happy with that as I belive cash is king in this game I want to invest again but the deposits are to high I could remortgage my house which is Morgage free but I'm scared of the SVR 4- 5% above base so my plan is to save and save and pay off chunks of the existing BTL as probly 90-95 LTV on most property's as I belive through extensive research intrest rates are nt goingyo mov a lot over the next 5years...mark wot you think.

Mark Alexander

20:17 PM, 28th January 2012
About 9 years ago

Hi Dave, yours is a safe strategy but it's unlikely to give you a massive pension. Obviously you've got to make your own decisions but you might like to check out my strategy which is documented across 16 linked articles, the first if which is linked from the author profile at the foot of the article above

Mark Alexander

20:23 PM, 28th January 2012
About 9 years ago

I also meant to add, Google "what you shouldn't do with your buy to let mortgage"

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