Under New European Rules Standard Variable Rates May be Linked to the Base Rate

by Mark Johnston

It seems that millions of borrowers have been left bemused by several lenders decisions to hike their standard variable rates (SVR) despite the historically low base rate.

John Heron, chairman of the Intermediary Mortgage Lenders Association (IMLA), believes that the base rate is now irrelevant to rates and these raises are down to underlying funding costs.

Banks want to rebuild their balance sheets despite 4 years of brutal write downs from dodgy loans. Therefore the pressure on banks to store liquid capital and rebuilds their balance sheets after the financial crisis, along with the euro zone turmoil are the main reasons that have prompted many lenders to raise their standard variable rates (SVR).

Lenders such as Halifax, Royal Bank of Scotland (RBS), Bank of Ireland and the Co-operative have all had enough of absorbing the rising costs of wholesale funding and have therefore decided to pass on some of the costs to their customers.

Industry consultant, Mehrdad Yousefi, states “the cost of funding has gone up sharply, around 300% in the past 18 months, so it is a logical step for banks to raise the standard variable rates”.

It is estimated that across all the affected banks customers will pay a combined £300 million more in mortgage repayments directly as a result of the increases.

Although this said, a recent proposal in the European mortgage directive, voted through by the European Monetary and Economic Affairs Committee, could force lenders to align their variable rates with possibly the Bank of England’s base rate.

Industry experts have therefore interpreted this proposal to mean that lenders would no longer be able to hike up their standard variable rates (SVR) as they pleased not with out justification and they would need to link it to some form of external rate.

The Council of Mortgage Lenders (CML) is now seeking clarification on whether the proposal means lenders will need to change the way they calculate their standard variable rates (SVR). The council stated that they need to clarify “whether the proposal only relates to those lenders that currently calculate their standard variable rates (SVR) based on a reference route or whether all lenders need to calculate their rates this way”.

Some experts believe that the sooner this proposal is implemented the better as they feel it would mean that the general public would be then given a greater ability to budget and as a consequence they will eventually start to spend again, thus helping the wider economy to recover.

A spokesperson from the Intermediary Mortgage Lenders Association (IMLA) said “overall this announcement is good news but it is far from being a ‘done deal’; this legislation has a series of stages to go through before it is finalised”.

However, a key stage of the European mortgage directive has been delayed for a fifth time due to struggles in finding a majority agreement on these controversial proposals, this therefore means that the finalising vote is now set to take place 6 months later than first planned.

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