Discount mortgages

pledgeX

My mortgage is up for renewal soon and I've seen some good rates for discount mortgages from a couple of smaller building societies.

Are there any rules governing what lenders can do to their SVR, and thus drive the interest rate that customers have to pay?

I'm a bit nervous that it's not directly related to the BOE interest rate meaning they could just increase the SVR to say 20% and screw all their customers over for a quick buck. That is of course assuming that there aren't rules to prevent this happening...

ACG

Is it linked to the BoE base rate? Some are.

However, if you think about it....If they increased the rate drastically they would not only get a bad reputation but they would also potentially have customers going repossessed left right and centre which is not very good for business.

Thrugelmir

The BOE doesn't lend money. So the base rate while it influences interest rates doesn't set them.

RhysHSCC

increasing the rate above that of competitors makes no business sense as those customers would just remortgage elsewhere meaning less turnover = less profit.

Get this question a lot for the building society I work at, as they have good variable for term products. The SVR can be whatever th company wants it to be, but even though they would get more money for a higher SVR, customers will simply not go onto it at all costs meaning it's pointless

pledgeX

I totally understand it's bad for business and that in the real world a lender wont just bump up their rates to extortionate levels.

I'm just trying to get an idea of how this rate is set. I get the impression a discount rate is a more risky/volatile choice than a bog standard tracker

RhysHSCC

Many things it set against

What the competition are doing.
Cost of lending
Overall business costs
BoE base rate

The List goes on and on

Nebulous2

The main reason for a lender to raise mortgage rates above the competition would be a financial crisis. In that case many of the solvent people who can prove affordability would simply move somewhere else leaving a lot of riskier loans. Look at Northern Rock. They would do that without penalty as they would be out of the early repayment period when they move to SVR.

In addition to that - assuming there isn't a big drop in your affordability, would SVR matter to you? Wouldn't you be looking for a follow-on product there or a remortgage somewhere else when your discount / fix ended?

amnblog

When lenders have a rate discounted from their standard rate they will have a large proportion of the mortgage book linked to that rate. Many of those customers have contracts that they are free to leave with penalty.

Therefore it makes no business sense for the lender to risk losing thousands of customers by pulling their rate up and out of line with the rest of the market.

pledgeX

Nebulous2 wrote: »

The main reason for a lender to raise mortgage rates above the competition would be a financial crisis. In that case many of the solvent people who can prove affordability would simply move somewhere else leaving a lot of riskier loans. Look at Northern Rock. They would do that without penalty as they would be out of the early repayment period when they move to SVR.

But if that financial crisis happened during the 3 year term I would have to pay an ERC to exit the deal (~2.5k).

Nebulous2 wrote: »

In addition to that - assuming there isn't a big drop in your affordability, would SVR matter to you? Wouldn't you be looking for a follow-on product there or a remortgage somewhere else when your discount / fix ended?

The discount rate is fixed for 3 years, so as soon as those 3 years are up I would move my mortgage, so in that respect that SVR doesn't matter, but during those 3 years the discount rate is tied to the SVR so it does matter

kingstreet

What happens if your circumstances change and you can't remortgage?

Your lender won't offer you a customer retention product?

One of my biggest reasons for avoiding Accord is that 5.79% SVR.

It may have products 0.2% cheaper than Nationwide, but with Nationwide having a 3.99% SVR and a record of offering decent products to existing borrowers, I don't see how anyone can make the first two years of their mortgage so much more important than the other 23 - 33.

If I did not explain this to clients, I would expect potential complaints later...

ACG

kingstreet wrote: »

One of my biggest reasons for avoiding Accord is that 5.79% SVR.

That looks far better on the suitability letter than "I have discounted Accord because they are Accord".