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The Rates, They Are A Changing


Apologies to the great Mr Dylan, but a while ago we cautioned that we might soon see a situation where although Bank Base Rate stayed the same lenders would start increasing their variable rates.

This is exactly what has now happened, with first NatWest increasing their rates for certain customers and then the UK’s biggest lender Halifax, grabbing all the headlines as they increase their Standard Variable Rate, (SVR) from 3.5% to 3.99%, affecting some 850,000 customers from 1st May 2012.

This change means an increase of around £40.80 per month per £100,000 on an interest only basis or £26.38 per £100,000 on a 25 year repayment.

This is a move that will no doubt stoke the fires of the anti-Lloyds, anti-banking, anti-business and anti-anything lobby, but as ever there are two sides to the story.

The biggest issue is of course that for many in the current environment, even a small rise in their monthly outgoings hurts in a disproportional manner than it may have done in more “normal” times. There are many who are only able to keep the wolf from the door because rates are low and a move such as this could lead to an increase in problems and arrears.

However, this is a harsh reality of life today and it should be remembered that at the heart of the matter, lenders are like any other business who need to sometimes make tough decisions to stay viable. Yes, profitability and balance sheet repair is undoubtedly a factor, but it is one of a few.

On the face of it, rates should be getting cheaper. After all since the start of the year LIBOR has fallen as have 1, 2, 3 and 5 year SWAP rates, yet we are still seeing lenders on the whole increasing their rates. There are clearly other forces at work.

In fact, the real cost of funds is still a complex affair for most lenders, with increasing regulation, tougher securitisation, an increasing cost of attracting savers and the thorny issue of capital adequacy.

To try to explain this Halifax provided the following examples:

“The cost of raising retail deposits to fund mortgages has risen considerably over the past few years. Throughout 2007, prior to tightening economic conditions, the average savings rate was 1.18% lower than the Bank of England base rate. However, since 2008, the average savings rate is 1.27% higher than the Bank of England base rate. This demonstrates the increased cost that banks must pay to attract retail deposits. Longer term funding costs are particularly high.”

“In addition, the cost of raising money in the senior unsecured and securitisation markets has increased. For example, in 2006, the cost to the Group of issuing a 4 year securitisation bond was 3 month LIBOR plus 0.11%. In July 2011, the Group issued a 4 year securitisation bond at the cost of 3 month LIBOR plus 1.45%. In February 2012, this increased to 3 month LIBOR plus 1.75% for a 3 year bond.”

As mentioned above, lending is also just one side of the proverbial seesaw, and whilst borrowers will be wailing at this move, many savers will be saying that this is about time and hopefully will be reflected in better savings rates. Although I would not hold your breath there!

Also, let’s face it, Halifax have just come in to line with other lenders and 3.99% is still on the competitive side compared to others. It should also be remembered that Halifax have not stopped lending, in fact far from it.

They are still the go to lender for many 1st Time Buyers, they support the new build industry and government initiatives and they have also bought out a cunning set of product transfers at reasonable rates to help existing clients who may face difficulties remortgaging away and need the protection of a fix.

For those who are able however, you can fix some way below this.

2 year fixed rates are available from 2.84%, (3.90% APR), whilst you can also fix for 3 years at 3.59%, (4.50% APR) or even 5 years at just 3.79%, (4.00% APR), all available with free legals and a free valuation for remortgages.

Alternatively, you could opt for a Base Rate Tracker from 2.74%, (3.90% APR) or a 3.44% tracker rate, (3.50% APR) with no early repayment charge.

What is very clear is that in this environment, independent advice is more important than ever and variable rates are beginning to live up to their name again; variable.

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