Research led by Dr Alla Koblyakova with the participation of Professor Michael White1, and sponsored by the ME Group has examined issues of fair pricing in Standard Variable Rate mortgages (SVRs) and identified that:
- The structure of the mortgage supply pre-determines that a major proportion of loans will eventually revert to the most expensive SVRs once their initial payment terms expire, placing the most vulnerable mortgage borrowers at risk.
- The current pricing structure of SVRs implies switching to cheaper options is beneficial for existing borrowers but may not be beneficial to lenders. This leads lenders to profiteer by discretionally setting unlimited margins for SVRs in excess of the relevant reference rates. This is because they choose to subsidize cheaper initial deals, or cover on-going losses, at the expense of SVR borrowers.
- The scale of overall excess mortgage payments is such that over 5 years under SVRs payment costs an additional £5,800 when compared to average quoted tracker rates and around £6,400 and £3,800 when compared to 2-year fixed and average variable rates respectively. When one refers to a 10-year time frame the excess in payments doubles.
- Some lenders, although not all, choose to exercise a policy of not allowing existing borrowers to access the most attractive products which they only make available to new borrowers and movers from other lenders aiming to increase market share and seeking to subsidize cheap deals at the expense of the excessive profits generated by SVR borrowers.
- Lenders’ consideration of furlough and mortgage payment holidays in their lending criteria, together with increased levels of unemployment, could create a new wave of mortgage prisoners who are at the mercy of SVRs.
- The unilateral varying of SVR pricing for profit purposes is unlawful under consumer protection legislation, which includes using to subsidize losses on discounted mortgages offered to new customers 2
- Lenders are already facing tens of thousands of claims from vulnerable consumers for SVR price manipulation.
- The All Party Parliamentary Group on Mortgage Prisoners has campaigned tirelessly for regulatory and legislative intervention on the issue of unfair SVR pricing, including a cap on SVRs 3
- Economic secretary to the treasury, John Glen, has recently opposed all three proposed amendments to the Financial Services Bill which aimed to (i) introduce a cap to SVRs on closed book cases, (ii) bring so called “vulture funds” under FCA supervision, and (iii) require mortgage customers to give their consent before their mortgage is transferred to an inactive or unregulated new lender 4
2 Unfair Terms in Consumer Contracts Regulations 1999
Dr Alla Koblyakova of Nottingham Trent University, a leading academic on UK mortgages, said “It is apparent that post 2008 the margins for SVRs widened significantly when compared to other common products. The scale of overall excess mortgage payments is such that over 5 years under SVRs payment costs an additional £5,800 when compared to average quoted tracker rates and around £6,400 and £3,800 when compared to 2-year fixed and average variable rates respectively. To assist with fairer SVR pricing, an option would be to limit SVRs margins to prespecified limits; for example, no more than 200 basis points above the relevant reference rate. It is unlikely that such light measures would distort the market, since 2.0 percentage points in excess of reference rate, retains the benefits of the profitability of SVRs compared to other products.”
Rob Cooper, CEO of ME Group a UK LegalTech group which specialises in retail mortgage disputes, commented “We have known for some time that lenders practices, post-2008, have been to profiteer from vulnerable borrowers who find themselves imprisoned on standard variable rates. We are pleased that Dr Alla Koblyakova has been able to identify the scale of detriment which has been caused. There is now no excuse for Regulators and Parliament to continue to fail to intervene, and for Financial Ombudsman to fail to redress those affected.”
After the financial crash in 2008, the number of people taking out a mortgage dropped substantially, creating a big gap in revenue for lenders. To maintain profits, lenders had to find new revenue streams from other parts of their business or drive more revenue from their existing mortgage book. The way that the latter was achieved, in a large part, was to increase the spread between lender borrowing cost, and the rates charged to borrowers. This was impossible for those mortgages where borrowers were on fixed or tracker mortgages, but the lenders proceeded to act on Standard Variable Rate mortgages.
What made this all the more profitable was that the Bank of England introduced the Term Lending Scheme and Funding for Lending Scheme that pumped lenders with cheap money to reduce borrowing costs on the street and in turn stimulate the economy.
Although SVRs were higher pre-crash, the spread rose after 2008 at a time when funding for mortgage lenders had reduced. This was deliberate so as to plug the revenue shortfall arising from the drop in mortgage inceptions, but in 2012, the policy was found to be unlawful as a result of European Consumer Protection case law. Lenders would have been well aware of the lawfulness of such actions after the OFT had issued comprehensive guidance to the industry in 2008.
Almost all lenders, post the legal precedent set in 2012, updated their terms and conditions so that they were and are compliant. However, they could not apply the revised terms to historical mortgages;
their only way of doing this was to switch the client’s product and therefore bind them into the terms of the new mortgage. Many have been doing this (without giving any indication as to the loss suffered as a result of the previous non-compliant terms) however, for those people who are ‘mortgage prisoners’ as a result of not fitting more stringent lending requirements, the lenders have not been able to achieve this.
Changes to mortgage lending criteria, as a result of the Covid-19 including penalising those who have been furloughed or who have taken a payment holiday, will likely cause tens of thousands more vulnerable consumers to be imprisoned on SVRs.
Dr Alla Koblyakova is a Senior Lecturer at the PMD, School of Architecture Design and the Built Environment, and is also involved in the work of the Centre of the Built Environment, Nottingham Trent University. She leads her own internationally recognized and collaborative research in the field of housing economics, mortgage finance and liquidity pricing issues. https://www.ntu.ac.uk/staff-profiles/architecture-design-built-environment/alla-koblyakova
Professor Michael White is the director of the Centre of the Built Environment at Nottingham Trent University. https://www.ntu.ac.uk/staff-profiles/architecture-design-built-environment/michael-white
ME Group is a LegalTech focused group providing a range of services to support consumers facing complex legal problems. Our aim is to improve the quality and reduce the cost of dispute resolution, for all parties through the use of LegalTech. www.megroupholdings.co.uk