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

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

16:21 PM, 23rd January 2012, About 10 years ago 36

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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

by

20:31 PM, 28th January 2012, About 10 years ago

Martin, not sure if your post is a comment on my status as an Adviser? 

If no, then .. oh, well, but if yes....

For the record, and if necessary I will make myself known (rather than using a forum pseudonym), but for the past 11 years I have built a portfolio of properties and I own a boutique lettings agency as well, so my Clients benefit from someone who not only talks the talk, but has walked the walk for more than a decade too.  I also have pension policies, life assurance plans, critical illness cover, savings, investments as well as loans, debts, overdrafts, a business with staff, I have JV's with selected partners and arrange insurance for portfolios, single properties, and even have many new FTB BTL'ers now developing their portfolios with my advice too (yes, BTL mortgages are available for them as well)..

My advice, therefore, is educated, experienced, qualified, without complaint or question, and my compliance department (who checks our advice and proposition regularly) has never failed us over many years of scrutiny.

Do I tick any more boxes?

by Mark Alexander

21:03 PM, 28th January 2012, About 10 years ago

I look forward to hearing from you - mark@property118.com

by

22:14 PM, 28th January 2012, About 10 years ago

OK so if I used you as a LA would you charge tenants anything.
If so I wouldn't use you
If you refused to subscribe to LRS and tenantid and use them ; I wouldn't use you.
All I would require you to do is provide the tenant.
If the tenant passes MY RGI check and I accept them I would then pay you about £450.00

If I wanted you to source a mortgage and you wanted to charge me commission I wouln't use you.
Life insurance , Cavendish offer about the best deal with rebating
Pension policies; not worth the paper their written; rip of charges.
ISA's far better solution
Critical illness; probably Cavendish again but internet  for sourcing
Debts. overdrafts  mmmmm I was rolling £300000.00 through numerous bank accounts every 3 months via credit cards before you even started in business.
My problem was instead of possibly unlike you I stupidly lent those monies to idiots who chose not to pay me back.
Otherwise I would have been sitting on about £9000000.00 of equity
So more fool me.
I reckon nobody was working the credit cards like I was; and me not being a professional.
Indeed I had occasion to discuss with advisors what I was doing and they just couln't work it out.
It was simple really you just had to read the terms and conditions and it was easy though time consuming; but I had no choice as I was not being repaid by idiots I lent to.
Insurance; easy to find it cheap on the internet.
Portfolio advice; no don't need that
It's pretty basic stuff you just need to buy property BMV if you can; get cheap mortgage deal, and have a decent deposit ideally.
Source tenants via an online LA
Do an RGI check and use  LRS, job done
No advice needed.
So as you can see I would not need your educated , experienced, qualified personage to manage my circumstances.
But I do appreciate that there will be people who do not wish to do the donkey work themselves; which is fine.
That being the case there will hopefully be a continuing amount of income generating work for you.
However I will not be one of those people.
That doesn't mean you are not needed for the services you provide; just that I can do my own donkey work and come up with the same answers as you without paying commission and in most cases receiving rebates over coming years etc.
More people are comfortable with making their own financial enquiries with the advent of the internet.
As a consequence there is less need for advisors as people are now more confident in carrying out their due diligence at their own speed in an unpressured environment.
You could say the internet has democratised advice so that we don't need to pay for it anymore.
I think that is now the way of the world and you can't put the genie back in the bottle now.

by

21:05 PM, 29th January 2012, About 10 years ago

Not sure if you were doing the credit card thing before I was in business as I actually started my first Company in 1985.  If you were indeed doing it then, then well done.

The reason my Clients work with me regularly and repeatedly (and yes, I do charge a professional fee for my advice - not 'commission', but a structured fee for professional advice provided) is that they recognise the value on buying products not just on price but much more importantly on features, flexibility and the ability to add, deduct, amend or adjust the terms when necessary.  My Clients typically own 200+ properties and even though they can intelligently go out and source their own insurance off the 'net - just like you can do so cleverly - they choose (funnily enough)  instead to work with a team of professional advisers who can secure best value deals (usually tailored and built behind the scenes with product manufacturers and underwriters) which not only achieve the answers which you truly cannot come up with as I do ("without paying commission" - it's so not just about cost as you'll learn through my posts) but about managing without issue the changing face of their portfolio's cover and financial structures at short notice as and when necessary, and sometimes at very very short notice.

There will (hopefully) indeed be a continuing need from the vast majority of investors who properly want due diligence carried out (by professionals who really know the underwriters, systems, procedures, features and who have the buying power to secure best value deals) and I too hope that my business will continue to be sought and instructed by our large loyal Client bank.  One never knows of course, however the true "donkey work" that we do is borne out by our service showing all of the above issues are more than just laymens "donkey work", which you have clearly convinced yourself is all that us Advisers do ... for a commission.

The debate about the 'genie' was closed years ago when it was proven without question that people who simply want a cheap policy or loan or mortgage (without any true care for the terms, flexibility, etc) can buy a product that way, and good luck to them.  We call these people "policyholders".  People, however, who understand the need for proper financial planning, the need for professional 3rd party due diligence, the essential requirement for fund/portfolio/investment management by active managers, the realworld view that true Advisers do not not work in - or implose -  a "pressurised environment" and their desire to achieve through considered and joined up thinking, we call "Clients".  Policyholders are commonly deemed to be a danger to themselves (hence so many IFA's, networks etc refuse to work on an 'execution only' basis as these  buyers are deemed far too high risk to themselves and the Companies) whereas Clients are a joy to work with and we have no worry that the 'genie' was, is  or will ever be a true threat to professional Advisers.

"You could say the internet has democratised advice so that we don't need to pay for it anymore." - oh yes you do pay for it.  Usually by buying products with higher rates, fees or by spending efforts, energies and wasting your own valuable time in protracted application processing, when for a relatively small investment, a true knowledgable Professional would take away the stresses, frustrations and issues, whilst at the same time presenting far better products which are not even found on any sourcing systems or comparison websites.

Mr Barrett, I think that with us there will be the issue of "ne'er the twain will meet", so I will not comment further and so I will allow you to have the last word, which you will no doubt be champing at the bit to have.

by

23:15 PM, 29th January 2012, About 10 years ago

No fair enough I started working the system about 15 years ago so you have been in business longer than me.
And no I think there is always needs for people such as you; it is just that not all people will need advisors/salesman such as you.
That is not to denigrate what you have achieved.
I would conjecture that there will always be people that would wish to use your services and all power to you.
It is just that you are not vital for everybody as it is possible to achieve what you may achieve but at considerably less cost.
That is the simple reality of the situation.
There is no right or wrong way; people will always choose what suits them and in most case with advisors they will have to pay dearly for such advice.
I see nothing wrong with that; it is their choice.
You clearly fulfill a need and have clearly managed and are managing such circumstances and making money to boot.
Which is great.
But as I have said it is horses for courses.
I am jusrt onne of those people that recognises I can go a different course without detriment to what I may achieve compared to to what you may achiev.
That is my choice and perogative..
I don't think there is any right or wrong way it is just what a person is comfortable with.
You clearly provide a level of comfort to your clients.
Personally I find I am able top manage without that comfort level.
That is not to say I would adhere to maintain the way I do things.
So I would never say never when it comes to possibly using an advisor.

by Mark Alexander

8:49 AM, 4th February 2012, About 10 years ago

@ea5142ca7d0f484968554866f7b417c6:disqus  - please see the comment I've provided a link to below and my response to it. Would you care to chip in?
http://www.property118.com/index.php/london-council-opens-letting-agency/24014/#comment-429019954


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