Can you believe that some lenders are increasing their Standard Variable Rates at a time of static low bank rates?

Despite the Bank of England Base Rate (BoEBR) staying put at an all-time low of 0.5%, some lenders have increased their standard mortgage interest rates by as much as 1.49%.

Nationwide's change is the most remarkable, introducing a new 3.99% SVR for mortgages completed after 30th April 2009. Previously completed mortgages are still eligible for the bank's former SVR of 2.5%.  That's a big difference.

Accord Mortgages has increased its SVR by 0.65% to join a host of other lenders on 5.99%. The other lenders making recent increases have all been building societies: Cambridge BS (up by 0.59%), Ipswich BS (0.5%), Marsden BS (0.46%), Mansfield BS (0.35%), Scottish BS (0.25%) and Skipton Building Society (a bit more complicated).

How do you explain a move like this?

Increasing SVRs now, despite static base rates, could be a sign of lenders' frustration: a deliberate attempt to unsettle existing mortgage borrowers and prod them towards new deals.

The problem for lenders is inertia. 2009's drastic base rate cuts have resulted in lower SVRs, which in turn mean people don't want to re-mortgage. Existing borrowers find that when they come to the end of promotional interest rates (fixed, discount variable and so forth), the Standard Variable Rate they revert to is low enough for comfort. For mortgage holders with low equity, there's little incentive to apply for new deals as the likelihood of getting a better rate elsewhere may be non-existent.

Why does this inertia trouble lenders? After all, isn't their first priority to keep a customer base that steadily repays its loans and doesn't default on its debts?

The answer is surely the reliance of many lenders on mortgage fee income — they depend on people changing deals in order to charge profitable £999 arrangement fees per remortgage.

Another possible, less sinsister reason for the increases is to allow these building societies to attract funds from savers by raising their savings rates.  It's a competitive savings market, and shoring up the deposit base seems to be what matters.

Does this affect you if you're not with one of the societies mentioned? Not yet, although the concern is that this will now spark an across-the-board series of SVR rises. Borrowers whose monthly mortgage repayment amounts have been mercifully subdued by, for example, Lloyds TSB's 2.5% Standard Variable Rate, might find the big banks are tempted to follow suit, leading to higher monthly repayments for a lot more mortgage customers.

You could be forgiven for being confused about mortgage market news lately.

Here are two headlines, released hours apart: "UK Mortgage Lending Revival Continues", and "Mortgage Lending Continues To Fall".

Talk about an apparent contradiction. But both would claim to be giving the true picture. Here's why...

What's Falling

Remortgaging.  Previously a big chunk of mortgage lending activity was spoken for by people switching, moving or extending their mortgages. This accounted for as much as 40 per cent of mortgage enquiries, although not 40% of actual borrowing when you factor in repayment of existing loans. Nevertheless, with people drawing on increases in equity to repay their consumer loans, remortgaging has been big business during the mortgage boom.

And why's it dropping now?  In short, low base rates and falling Loan To Value limits mean that people either can't remortgage, or don't want to. For many who would, it's a case of 'wait and see'.

The size of the drop is enormous – around 57 per cent down from the market peak.  However, luckily for all those mortgage middlemen, a different part of the market is rising rapidly... 

What's Rising 

First time buyers. They're like a tide: having been held back for nearly two years by the credit crunch, buyers seeking their first mortgage are being encouraged by stable low mortgage rates, reports — accurate or otherwise — of a bottoming-out in house price falls, whispers of economic recovery and the returning availability of lower deposit (higher Loan-To-Value) mortgages.

Ditto home movers.  A loosening-up of tight credit conditions, particularly a renewed willingness to lend by the bigger banks, has supported both lenders and buyers who have lost their terror of dropping house prices.

The rebound among first time buyers and movers isn't accounting for enough lending to negate the effect on the overall figures of the drop in remortgaging. But in context, purchase lending is resurgent enough to warrant the 'revival' headlines.

Other factors behind the headlines

There's a clutch of other reasons why some news sources report 'fall!' as others shout 'rise!'. 

Some report monthly figures and compare them to the previous month.  Others plot the year-on-year trend.

Some refer back to the market peaks of 2006, others draw a different benchmark.  

Some report numbers of applicants; some report approvals; others report the amount of money being lent out.

There's only one thing we can generalise: it's a time of mixed signals!

Viewed in gross lending terms, we have two lines (remortgage and purchase) that are moving in opposite directions.  They crossed over in May 2009 this year, and continue to diverge. 

In short, if you view 'the mortgage market' to mean strictly gross lending, the headlines that say 'falling' are accurate in several ways.  But if you intend to read mortgage figures as a reflection of housing market activity, descriptions of a 'revival' are more or less justified.

Purchasing up, remortgaging down in August

Last month's mortgage figures were released today, and they're interesting.  Not for what they say overall, but for what lies underneath.

Gross mortgage lending totalled an estimated £12.6 billion in August, according to the Council of Mortgage Lenders. This is 13 per cent lower than July's revised total of £14.5 billion, but that's probably seasonal: lending usually dips in August, even in boom years.

What's interesting is the disparity between different types of lending.  Loans for house purchases have actually increased--but it doesn't show in the overall figures because of a drop in remortgaging.

The ongoing lull in remortgage activity has taken most of the fizz out of gross lending figures, since it used to account for around a third of mortgages issued. Last August, a flurry of remortgaging contributed to gross lending figures of £19.9 billion, as householders worried about the prospect of steeply increasing rates (that was before the succession of large cuts).

And nobody expects the remortgage lull to cease any time soon. Present market conditions aren't changing in a hurry, so borrowers find themselves in one of two camps:

1. Can't Remortgage

Reasons?

• they're tied in to a fixed rate
• minimum equity requirements are higher (typically 20%)
• there are no cheap loans on the higher-LTV mortgages
• they're in negative equity already

2. Don't Need To Remortgage

Reasons?

• falling prices mean there's no extra equity to release
• SVR rates are historically low, thanks very much!

There are no quick answers for the first camp.  Time will be the healer in all four cases: they either wait out their tie-in period, wait on the lending market to loosen, or wait for the buying market to start boosting their homes' values again (the latter two are, of course, strongly linked).

Likewise, until interest rates go up, the second camp has no incentive to look at an alternative loan... and with the economy still in the doldrums, nobody's wishing interest rates upward at the moment.

So, August's figures aren't as straightforward as they seem, and we'd like to see a bit more press focus on the growth in new mortgages for purchases. The overall figures don't tell the full story at all!