By Rachel Williams
HSBC has stirred a mortgage market price war by reducing its standard variable rate by almost 1%, despite the Bank of England’s decision to keep the base rate at 6% for the fifth month in a row.
The cut has been backed by a promise that its rate will never exceed 1% more than the Bank of England base rate.
With a margin of 0.75% over bank base rate, the lender’s rate is now on a par with the average SVR this time last year, when interest rates bottomed out at 5%.
Intelligent Finance has also entered the market on a similar margin, offering a flexible mortgage with a SVR of 6.8%, while Woolwich is offering a variable rate of 6.75% on its new Open Plan Offset mortgage.
With lenders such as Northern Rock, with an SVR of 7.79%, Halifax and Abbey National at 7.74% and Nationwide at 7.29%, HSBC’s rate cut leaves its competitors looking comparatively uncompetitive.
Ray Boulger, technical director at John Charcol, said: “Due to the competition in the market, some major players are reducing their rates to where their SVRs stood a year ago.”
But he said it was unlikely the big lending banks will follow suit on the grounds that they would not be able to operate on such slim margins.
“HSBC’s mortgage book only accounts for a small proportion of its business, so it can take this hit on its margin and the impact is not likely to be huge. But for major lending banks, such as the Halifax, such a cut would have a much bigger impact on profits,” he said.
Celia Rowland, spokeswoman for the Halifax, said: “HSBC is a small player, it is the 12th largest lender with less than half a million customers, and of those customers not all will be on an SVR.”
She added: “We have no immediate plans to follow suit and most of our customers take a fixed or discount rate anyway.”
Boulger said that mortgage lenders unable to follow HSBC’s lead are now likely to side with one of two strategies – either offering long-term value on a competitive SVR or, where this is less attractive, by offering hefty discounts.
With increasing numbers of borrowers treating their mortgage as a commodity and remortgaging on a regular basis, fewer are moving on to the SVR. Boulger said that lenders are therefore making less money as it is this income that subsidises the new business.
He said that, as a result, HSBC is opting to target borrowers looking for value over the long term and not just in the first few years, in a bid to retain its customer base.