Colin Snowdon of Aldermore argues that Skipton’s move is to the benefit of a sustainable mortgage
Skipton’s recent announcement that it intends to undo its deal with borrowers and raise its SVR from 3.50% to 4.95% from 1 March, brings into sharp focus a fundamental issue for lenders and building societies and small banks in particular.
That issue is funding costs. With little activity in the wholesale markets and lenders under pressure from the FSA not to use them anyway, most lenders are dependant on retail funding (preferably term deposits) to fund their mortgage activities. As a result, competition for retail deposits is intense a situation which has, ironically, been exacerbated by the government competing in the very same markets via National Savings. I wonder how many mortgage customers realise that one effect of mushrooming government debt is upward pressure on their mortgage rates? And of course the taxpayer owned lenders have access to subsidised, cheap funding from the Bank of England’s operations – yet more competition from the government.
The problem for lenders such as Skipton is a simple but profound one competing at 4-5% in a finite UK pool of retail fixed rate savings and promising an SVR of 3.5% simply doesn’t stack up financially.
The truth is that the days of lender SVRs being linked to Bank Base Rate or Libor are numbered. What increasingly matters to lenders is the overall real cost of money. In the future, an increasing number of lenders will set mortgage rates with reference to actual funding costs not external and theoretical reference rates such as BBR or LIBOR. In this way mortgage finance will come to operate in isolation from the interbank and capital markets.
Sound familiar? Those of you who have been in the mortgage market as long as I have will remember the good (or was it bad?) old days when building societies set ‘the mortgage rate’ themselves as a cartel each month. There’s nothing new in this world – what goes around, comes around! Maybe when Alistair Darling wished for a return to ‘good old fashioned banking’ this is what he had in mind.
There have been comments in the press from mortgage brokers who say that if the Skipton’s move becomes the start of a trend, it will knock consumer confidence and hamper any recovery in the housing market. They also have concerns that other lenders may well take advantage of the Skipton’s move and push up mortgage costs. Brokers concerns are understandable and we will no doubt see yet more sensational headlines about profiteering and greedy lenders.
However, mortgage finance needs to be put on a viable footing if the supply of funding is to be increased (which is surely a good thing for the market?). Perhaps, just as in the 1970s, we need a debate not only about the cost of mortgages, but about their supply and availability. Is it to be cheap mortgages for those lucky enough already to have them (particularly from the state owned banks), or a plentiful supply of mortgages so that our children can get on the housing ladder?
It has been said that the only thing we learn from history is that we can learn nothing from history. And yet, as we stumble forward into a new world of mortgage finance, perhaps there are more than a few signposts and lessons we should take note of from the past.