What are the implications from the increase in Halifax's SVR cap?
Ray Boulger of leading independent mortgage adviser John Charcol comments on the 0.75% increase in Halifax's SVR cap.
"Halifax is in a unique situation as far as its old SVR is concerned. It is the only major lender with an SVR cap which its mortgage conditions allow to be changed. It can do this by giving 1 months notice and allowing those borrowers affected the opportunity to redeem their mortgage within 3 months without paying any ERCs.
"The other major lenders which had an SVR cap, Nationwide and Lloyds TSB/C&G, whose cap is 2% above Bank Rate, had no wiggle room in their contracts and so no opportunity to increase the cap. This is why such a large proportion of borrowers with these lenders are now staying on their SVR of 2.5%. It is also why these lenders introduced a new "SVR" for both new borrowers and existing customers taking a product transfer from 2009 and 2010 respectively; this new revert to rate has been at 3.99% ever since it was introduced.
"The only Halifax borrowers to whom the cap applies are those who started their mortgage between 2001 and Sept 2007 and who have part of their mortgage on a fixed or tracker rate, and hence have an early repayment charge (ERC) on that part of the mortgage, and part on SVR. There are only 40,000 customers in this situation. However, the far larger number of borrowers who took out a Halifax mortgage before it introduced a new "revert to" rate for all applications from the beginning of 2011 are in practice also protected by this cap. This is because it would be logistically extremely difficult, if not impossible, for Halifax to have changed its SVR for some customers but not others.
"Lloyds Banking Group stated last week that overall 56% of group balances were on SVR or equivalent. Halifax is by far the largest lender in the group but the proportion of Lloyds TSB and Cheltenham & Gloucester borrowers on SVR will probably be even higher than Halifax's because of their very low 2.5% SVR. Halifax's share of the 11.25m UK mortgage customers, including its BM Solutions brand, is around 20% and these figures suggest that around 1 million borrowers currently have all or part of their mortgage on Halifax's SVR, currently 3.5%.
"The important number therefore for customers who will be affected by this change in the cap is not the 40,000 who are directly affected, but 1 million.
"Bearing in mind the difficulties Halifax had after the last change to the cap in September 2008 when the FSA forced it to write to many of its SVR customers, and also pay compensation, I am sure it will have been ultra careful to make sure everything is being done by the book this time. It will also have been mindful of the problems and negative PR caused when it operated a dual SVR policy earlier.
"Although Halifax says the change will not affect what customers' pay this is pure spin as it can't legally change the rate until after the month's notice expires on 31 March. However, there would have been no point in incurring the negative PR from this move if there were no plans to increase the SVR in the near future. I suspect it won't be very long before Halifax aligns both its "revert to" rates at 3.99% and so any borrowers currently paying 3.5% should expect an increase soon after 31 March.
"The revert to rates (although Woolwich's SVR is 4.99% its borrowers revert to a lifetime Bank Rate tracker, currently Bank Rate + 3.39%) of the top 5 lenders vary between 3.89% and 4.24% and so Halifax is effectively giving itself the flexibility the bring most of its borrowers into line with its peers. By raising its SVR cap to Bank Rate + 3.75%, if it increases the rate to 3.99%, as I expect, it will be able to claim that it has not increased the rate as much as it could have done.
"Because Halifax is in this unique position of having a cap it can change I don't expect this move to result in any significant SVR contagion. However, as we have seen from the recent purchase by The Mortgage Works of a Bank of Ireland mortgage book where borrowers had an SVR of only 2.99%, compared to TMW's 4.79%, and the recent 0.11% SVR increase to 4.95% from another Lloyds Banking Group company, Bank of Scotland, that doesn't mean no other borrowers will be affected by this trend. Lloyds is no longer lending through the Bank of Scotland brand and borrowers most at risk of seeing their SVR increase are those with a lender which is no longer lending and those whose mortgage is sold on.
"Funding pressures because of the Eurozone crisis became much more severe in the second half of last year but the ECB action in offering unlimited amounts of money to all Eurozone banks, subject to acceptable collateral, at 1% for 3 years in November last year, with a further opportunity tomorrow for banks to take more funds on the same terms, has alleviated the pressure and improved Eurozone banks' liquidity. This probably accounts for the 3m sterling Libor rate edging down slightly by 0.03% from a peak of 1.09% last month to 1.06%. Whilst this is a very small movement what is more important is that the steady upward trend in the Libor rate until last month has not only stopped but been reversed, which suggests that funding pressures have eased a little. Lloyds Banking Group can tap this cheap money from the ECB through its Irish subsidiary and is expected to do so, which should help its average cost of funds.
"If there was going to be a general increase in SVRs it would have been more logical for it to have happened over the last 6 months as a result of the increased cost of funds during that time. Now that trend is being reversed, albeit only slightly, there would be less logic in an increase at this stage. Therefore a general upward movement in SVRs is unlikely until Bank Rate changes, which looks to be at least two years away.
"This change in the rate cap from Halifax certainly puts a whole new meaning to its catch phrase "The bank that gives you extra." Extra is not always good!