An SVR is a baseline rate set by every individual mortgage lender – it is not tied to the Base Rate set by the Bank of England but tends to move up and down roughly in line with Base Rate, at the lender’s discretion. An SVR is also a lender’s default rate applied when a customer comes to the end of their mortgage deal, such as a fixed rate, tracker or discount. The SVR is usually higher than the mortgage fixed or discounted rate, depending on when the deal was taken out.

As of 23 January 2018, new Santander mortgage customers will be moved on to a new variable rate which the bank is calling its ‘Follow-on Rate’ (FoR) once their fixed or tracker rate deal ends – the earliest in 2020.

The FoR is a variable rate that tracks at 3.25% above the Bank of England Base Rate which currently stands at 0.5% so if it were applied now, it would come in at 3.75%.

This is nearly 1% lower than Santander’s SVR, which currently stands at 4.74%. In contrast, the SVR isn’t pegged to the Bank of England Base Rate so it has free rein to set this default rate when a customer comes to the end of their mortgage deal.

Following the announcement of the FoR, there was concern the move would lead to confusion and inertia among borrowers who may be happy to stay on a cheaper revert rate compared to the SVR, rather than remortgage or opt for a product transfer to a more competitive fixed, tracker or discounted rate.

Santander’s results published last week revealed 78% of mortgage customers who reached the end of their incentive period stayed with the lender. It also revealed its proportion of SVR balances fell from 19% in 2016 to 15% in 2017, representing a decline of £5.5bn from £28.8bn to year end 2016 to £23.3bn to 31 December 2017.

The outlook stated: “Banking NIM [net margin interest] for 2018 is expected to be lower than in 2017, as a result of ongoing competition in new mortgage pricing and SVR attrition. The decline in the SVR balance is expected to be slightly lower than the net £5.5bn reduction in 2017.”

Divisive and unfair?

Others saw the move as divisive and unfair – why should there be one higher revert rate for borrowers who applied pre-23 January and one cheaper default rate for those who applied from 23 January onwards?

When asked whether Santander had any plans to move SVR borrowers onto the new FoR, Santander failed to answer.

But while it won’t automatically put existing borrowers on the FoR, Santander confirms those on the higher SVR can ask to be moved on to the cheaper FoR.

However, there’s no guarantee that everyone who asks will be moved. For example, borrowers in arrears on their mortgage payments, arguably those who stand to benefit the most, may not be given access to the FoR. And Santander warns that it may not be cheaper in the long run.

Graham Sellar, head of mortgage business development at Santander, says: “The FoR is aimed at new business customers, though SVR customers can move on to the FoR.

“Customers who mature onto the SVR will have the ability to switch to the FoR without charge. There’s no cut off point and it’s open to everyone.

“If customers are paying the 4.74% SVR, they already have the opportunity to speak to us to see what rates are available to them.

“Even though the FoR looks 1% below the SVR, it doesn’t mean that it will be lower as the Bank of England Rate can move lower or higher. Borrowers need to take independent financial advice – we don’t want them to move to a ‘lower’ rate as over the long-term, it can be something different.”

The 3.25% FoR differential which tracks the Base Rate is guaranteed for as long as the customer remains on the product, so any Base Rate rise or fall would be passed on in full, Santander confirms. As an example, if the current 0.5% Base Rate were to rise 0.5% to a full 1% by 2020, the FoR would come in at 4.25% – still cheaper (0.49%) than the SVR.

Calculated move

Given the dual revert rate, brokers suggested the move was a tactic deployed to undercut its rivals’ SVRs and allow a more favourable affordability calculation. All lenders are obliged to use affordability calculations when working out the maximum they can safely lend to borrowers, basing their sums on higher interest rates than the headline rate offered on the deal in question, to make sure borrowers can afford their repayments at a later date when the deal period comes to an end.

Ray Boulger, senior technical manager at John Charcol, explains: “The new rate means that Santander is now around 0.25% lower than its peers, rather than 0.75% above as it had been with its old SVR. Santander has struggled in the past to boost its net lending figures, despite decent market volumes of gross lending and an active product transfer strategy. I suspect part of the reason for this struggle has been its high SVR, which increases the proportion of its borrowers who choose to remortgage and switch to another provider. Santander has clearly introduced the new reversion rate in a bid to attract extra new business.”

On the affordability point, Boulger says: “I suspect that a key factor in this decision was the Prudential Regulation Authority’s (PRA) move last year that required lenders to assess affordability at 3% above their ‘revert to’ rate rather than the previous requirement to base it on a 3% increase in Bank Rate. The latter allowed lenders more flexibility on the basis that their SVR could increase by less than the Bank of England’s Base Rate.

“By changing its FoR for new borrowers, Santander can now use a rate of 6.75% in its affordability calculation instead of its previous 7.74%.”

However, Santander maintains the decision is a result of ‘consumer research’ which showed that ‘more people’ understood the new FoR than SVR.

Santander says: “In November, the UK experienced the first increase in Base Rate in 10 years. With this change, we recognised that some customers didn’t fully understand what SVR meant for them and their mortgage payments. Some were a little confused thinking that it tracked Bank of England Base Rate, which is not the case. In an effort to make our products and services clearer, we carried out some research with customers and as a result, created the new FoR, which does track the Base Rate, moving upwards or downwards in line with the changes.”

The consumer research was conducted in Q4 2017. Santander was unable to confirm how many consumers were polled and where the sample was taken from.

Borrower advice

Whether Santander’s FoR results in more or less clarity for borrowers, experts point out that there is one clear course of action for all borrowers coming to the end of a fixed rate, tracker or discounted deal.

Boulger observes: “The real point is, if you pay the SVR then you are paying too much.” He adds that those on an SVR may be better off asking the lender about a product transfer or remortgage elsewhere for a more competitive rate.

David Hollingworth, mortgage expert at L&C, agrees: “Santander’s FoR is still an SVR so if you do nothing, you will be on the SVR. Borrowers should be taking action.

“Even those borrowers who will revert to the new ongoing tracker deal should diarise a review as it remains far higher than the very attractive rates that are on offer currently. It may be less of a payment shock to jump to 3.75% rather than 4.74% but it’s a hike nonetheless.”

Seconds out

Many borrowers may recall the trouble faced by Halifax and Nationwide Building Society in 2002 when they compensated thousands of borrowers to the tune of millions of pounds after introducing second variable rates called ‘Base Mortgage Rates’ which were lower than their SVRs for certain groups of customers.

In total, Nationwide paid £90m to 400,000 customers while 30,000 Halifax customers received between £100 and £500 each.

The Financial Conduct Authority confirmed Santander is acting within its rules and the Financial Ombudsman Service said it can’t comment as the FoR hasn’t been implemented yet and as such, it has not received any complaints. It added: “If we do receive complaints on this we’ll look at them on an individual basis, based on what’s fair and reasonable and we’ll take into account relevant laws, regulations, guidelines and good industry practice at the relevant time.”