“As interest rates have increased, then you might argue that the differentiator and being able to stress test at a lower amount for longer [deal periods] is a competitive advantage and beneficial for borrowers.
“But we haven't built the capability to differentiate the stress rate, so our systems will only apply one stress rate. It is something that we're looking to build, because we obviously see the benefit to borrowers and to us of being able to do that.
“The problem is that in the customer journey, you provide a decision in principle and a lending/borrowing amount before you even get to product selection. If you have different stress rates for different [deal periods], then you would have to give multiple borrowing amounts.
“And one of the byproducts could be consumers taking a longer-term fix that might not be appropriate, just because they can borrow more.”
Discretionary but not arbitrary
Fixed mortgage rates tend to occupy headlines more than lenders’ reversionary rates. But the latter can still be at play in the background, even if many borrowers do not plan to pay their lender’s reversionary rate.
One in 10 residential mortgage borrowers (9 per cent) were on their lender’s SVR, according to the FCA’s Financial Lives 2022 survey, down from 12 per cent and 16 per cent in 2020 and 2017 respectively.
“Not many people sit on the SVR these days,” says Merritt. “We actively prompt to make sure that customers understand their options; and where they are eligible for a product transfer rate, we make them aware of that. And in most instances, it's a cheaper option.”
Reversionary rates are generally set at lenders’ discretion. The lowest and highest SVR can have a difference of more than 3 percentage points, creating a corresponding difference between lenders’ stress rates.
“Your SVR is there to manage your credit risk, because customers that sit on SVR potentially might pose a different risk profile to those that are in a fixed rate deal,” says Merritt.
“We use it to manage liquidity. We do need a level of redemptions in order to fund new mortgage business, and we need to free up liquidity at different points in time. So SVR in a way acts as a disincentive for customers to just roll on it and sit on it. Otherwise you'd end up with everybody sat on SVR if it was too competitive."
SVRs also control the level at which a lender has to stress test affordability, so it acts as a responsible lending tool, making sure that the SVR is sufficient that lenders are testing affordability at the right level.
