Brokers could win from hike in SVRs
Posted on January 18th 2010
We are starting to see some evidence of mutuals pushing up their SVRs and whilst many commentators refer to BBR being static at 0.5% and not being able to understand this move it is likely to be the norm over the next 12 months.
The very simple fact is that a low BBR will actually force many banks and building societies to put their rates up. That does sound counter-intuitive but here’s the reason. In a normal market banks and building societies savings books make a profit by paying savers a rate that is less than BBR.
Lets say BBR is 5%, I would expect a building society in this scenario to pay a blended average rate of 3% to its savers, this would give it a positive spread of 2%. With BBR at anything less than 2% this model simply starts to break down and with BBR at 0.5% it is positively damaging profitability for those organisations that take deposits.
For the past 18 months savings books have been loss making and to add insult to injury there has been fierce competition for retail deposits pushing the cost of retail deposits even higher. Right now instead of a positive 2% spread I would estimate that there is a negative 2% spread. This is why some lenders are being forced to put SVRs up. The saying that every cloud has a silver lining comes to mind in this instance. If there is one thing that will bring a remortgage market back it is revert rates or SVRs being higher than new business pricing. Brokers could well be the inadvertent winner from a hike in SVRs.
