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Retention and affordability behind Santander’s second SVR – Boulger

  • 19/01/2018
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Retention and affordability behind Santander’s second SVR – Boulger
The need to improve net lending figures and ease borrower affordability calculations are behind Santander’s decision to introduce a second standard variable rate (SVR), according to John Charcol senior technical manager Ray Boulger.

Boulger believes better customer retention and a bid to grow new business levels were the priority for the lender when making the change, rather than its customer research.

Santander announced the change to a Bank of England Base Rate linked SVR yesterday, and told Mortgage Solutions it was primarily intended to simplify the process for customers.

However, Boulger disputes this suggestion.

Writing on the broker’s website, Boulger said it was important to see how the new rate would position the lender in the market.

“The new rate means that Santander is now around 0.25% lower than its peers, rather than 0.75% above as it had been with its old SVR,” he said.

“Santander has struggled in the past to boost its net lending figures, despite decent market volumes of gross lending and an active product transfer strategy. I suspect part of the reason for this struggle has been its high SVR, which increases the proportion of its borrowers who chose to remortgage and switch to another provider.

“Santander has clearly introduced the new SVR in a bid to attract extra new business,” he added.


Affordability assessment

Boulger also highlighted the need to take into account stress testing at 3% above the revert rate for new customers when approving applications and how this could be impacting the lender.

Last year the Prudential Regulation Authority (PRA) changed its rule to require lenders to assess affordability at 3% above their revert to rate, rather than a 3% increase in Bank Rate as previously the case.

“By changing its follow-on rate for new borrowers, Santander can now use a rate of 6.75% in its affordability calculation instead of its previous 7.74%,” he continued.

“Most lenders believed the old PRA rule was too onerous and Santander isn’t the only lender to change its revert to rate in the light of the new PRA rule.

“An alternative approach for other lenders with a high SVRs is to offer a discount off SVRs, until the end of the five-year term relevant for this rule,” he added.


Regulation problem

Boulger concluded by noting that this highlighted a problem with the current PRA policy particularly affecting lenders who increase their SVR when the Bank of England increases its rate.

“This immediately impacted the rate they have to use for the affordability calculation, despite having no evidence that the PRA expects interest rates to peak any higher now than it did before the base rate increase,” Boulger said.

“As long as the PRA retains this rule in its current form, every time there is a Bank Rate change it should review whether it considers a 3% margin is still appropriate?” he concluded.

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