Recently, the personal finance columns in the national press have been pre-occupied with transparency in mortgage rates and taken the high street lenders to task for operating dual standards ‘ offering lower standard variable rates (SVRs) to new customers than those which existing customers are paying. The difference between the dual SVRs can be considerable ‘ often as much as 1.0% ‘ which can make a substantial difference to the total amount of interest paid over the life of a loan.
It has been said major lenders do not switch their existing customers immediately to the cheaper rates because they need the customer’s permission to vary the terms of their contracts. It is up to borrowers to effect the switch to the lower rate.
A few individuals have refused to take no for an answer and enlisted the help of the Financial Ombudsman Service (FOS) in their fight for a fair deal. In similar cases, both Halifax and Nationwide have been told by the FOS to compensate individual borrowers for keeping them on the higher level SVR, instead of allowing them to shift to the more competitive rate reserved for new customers.
Apart from the current issue of double standards for SVR customers, these borrowers are at the mercy of their lenders who are not obliged to follow base rates downwards immediately after a reduction or, indeed, at all.
For those borrowers who want absolute transparency in SVR movements, a tracker mortgage is the obvious answer, as it will be tied into an externally fixed interest rate such as the Bank of England base rate. However, most borrowers believe an SVR will always offer a fair deal and see no reason to choose a tracker rate until they find they are stuck with an SVR that has not matched base rate reductions.
Most niche lenders have had transparent variable rates from day one. Such lenders set rates at a fixed percentage above base rate or Libor, so borrowers know they cannot let any slippage start to occur between base rates falling and lending rates following suit. This offers the public true value for money as it is impossible for them to delay lowering their rates if the base rate and Libor fall.
Perhaps the time is now right for these lenders to take a leaf out of the niche lenders’ book and embrace true rate transparency.