Customers do still revert to reversion and standard variable rates (SVRs) in certain circumstances, and so this remains a key part of the advice process.
Dominik Lipnicki, director of Your Mortgage Decisions, says: “The client’s expectation is that they will be moving at the end of the introductory period so whatever happens after that is pretty immaterial for most clients.
“But you could be made unemployed, your credit history could turn against you or we might have another crash in the housing market where loan to value becomes a huge issue and people could be in negative equity and unable to remortgage elsewhere.
“As an adviser, you should really be discussing what happens when a rate ends and if the client was unable to remortgage, but I fear that not many consumers are that interested,” he says.
Deals, deals, deals
In some cases, brokers are firmly focused on delivering the deals that clients want.
Chris Bailey, mortgage coach at Mojo Mortgages, says: “We calculate the true cost of deal for the customer on the deal period only. Throughout the process we appraise the whole market, constantly, for our customers.
“They know all their options and they are very much aware of the immediacy of the reversion rate,” he says.
However, other intermediaries have seen situations where clients slipped onto reversion rates owing to a change in circumstances.
Alastair McKee, managing director of One 77 Mortgages (pictured), explains: “The classic example is a client who took out an initial two-year fixed rate and 18 months later went self-employed. Most lenders won’t touch them until they have at least 12 to 24 months of signed accounts meaning their only option is to stay with the existing lender and their retention rates.
“Added to that, you’ll get some clients that leave things to the last minute and therefore don’t realistically have the time to remortgage to another lender and therefore a retention rate is the only viable option for them.
“All good brokers will always compare the retention rates for a lender to the open market rates so yes, they do play a major factor in the consideration of the client’s rate,” he adds.
Dangerous apathy to rates
While advisers’ focus is strongly driven by customers’ concerns about monthly repayments, brokers equally have a role in guiding borrowers’ thinking.
Lipnicki continues: “Borrower apathy to rates is immense and that’s hugely dangerous. Plenty of borrowers have never been in a situation where rates were higher, because they’ve only had a mortgage for the past 10 or 11 years and they’ve never seen it before.
“Plenty more do not remember the early nineties when mortgage rates were 15 per cent.
“People take it for granted and think that if the rate rises it will be tiny, because that’s what they’ve seen over the last few years. But of course we have plenty of potential dark clouds ahead of us with possibly Brexit, a possible global economy slowdown, the housing market and how expensive it will be to borrow money.
“Borrowers should think about the future by looking at the past and not just expecting rates to be at a low, because it’s far from certain that that’s where there will be,” he adds.
Rates go up as well as down
When the base rate plummeted following the financial crisis, lenders with lower reversionary rates were caught out.
David Hollingworth, London & Country Mortgages, associate director, communications, recalls: “When base rate did plummet, there were issues with some of the lenders that had low variable rates, because they’d never foreseen that base rate would come down so significantly. So some were unable to maintain the tracking margins they’d previously suggested they would, and used exceptional circumstances.
“Nationwide was two per cent over base maximum, but that was in the days the base rate was five per cent plus. Suddenly it was 0.5 per cent. They did honour it, but they had to remove it from new business products.
“So there are other issues that lenders have to be mindful of in terms of how they might enhance those follow-on rates.”
Spread of SVRs
Hollingworth also notes that there is a “substantial variance” in standard variable rates (SVRs) between lenders today.
“Some lenders’ SVRs are in excess of six per cent, whereas the likes of Nationwide, NatWest and Halifax are all coming in at 4.24 per cent. You’re looking at a range of around two per cent.
“You can’t just rule it out, but where you have two deals that are not identical, it’s a difficult balance whether to pay more on the first five years of the fixed rate, which is the functionality that you’re really interested in, because you might have a lower ongoing rate that hopefully you’ll never have to pay.”
“But there are instances we can point to, Northern Rock borrowers for example, who have unfortunately been left with little or no choice.
“Therefore the reversion rate should be inconsequential, but ultimately if two deals look pretty much identical and one has a lower reversion rate, all other things being equal, you’d suggest that is the better approach,” he concludes.