Standard Variable Rate  

Variable rates soar despite base rate cut

Variable rates soar despite base rate cut

The average two-year tracker rate has increased by 0.07 per cent in just one month, cancelling out the base rate effect.

The average tracker rate is now back to the same levels as July 2016, before the Bank of England slashed the base rate to a historic low of 0.25 per cent in August, according to data from Moneyfacts.

After the average two-year variable rate reached an historic low in September following the Bank of England’s cut to base rate, Charlotte Nelson, finance expert at Moneyfacts, said a logical assumption would have been for the market to stabilise at this new low.

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Instead, Ms Nelson said it has increased back to the level it stood at shortly after the European Union referendum.

This increase has effectively offset any reductions that may have occurred after the base rate announcement on 4 August.

 Jul-16 Aug-16Sep-16Oct-16
Average two-year tracker rate2.01%2.13%1.94%2.01%
Source: Moneyfacts  

Ms Nelson said: “This increase to the average two-year tracker rate reflects the uncertainty in the market.

“Providers are facing heightened risks as a result of the wider economic issues such as house price stability and a potential increase to the inflation rate, which may affect household expenditure.

“This has likely made the low level seen in September unsustainable.

“With the fixed rate mortgage market highly competitive and lenders preferring to lock borrowers in for a longer term, there is no wriggle room to increase rates in this area. So, the variable rate market is an easy target for increased rates.”

Martin Reynolds, chief executive of SimplyBiz Mortgages, said there is always a period of adjustment pre and post any change in the base rate as both the money markets and lenders factors the changes into their models.

He said this is for either an increase or reduction.

Mr Reynolds said: “The challenge for any lender will be ensuring the products still meet their mandated internal return on capital hurdles.

“There are many factors taken into account of which cost of funds is just one.

“While it is always disappointing to see rates rise we must be mindful that we are in a very low rate environment so rates at 2.01 per cent are still historically low and will form part of any advisers thought process when making recommendations to clients.”

Jeremy Duncombe, director of Legal & General Mortgage Club, said fixed rates and variable rates tend to be funded differently by lenders, so the base rate or SVR are not directly linked to these prices.

He said fixed rates tend to be funded from the money markets, and so reflect future expectations and sentiment, whereas variable rates are often funded by savings rates.

With savings rates so low, it is difficult for lenders to keep pricing variable rates lower without reducing margins, he added.

Bernard Clarke, communications manager of the Council of Mortgage Lenders, pointed out borrowing rates remain very low by historical standards, with Bank of England data showing that rates on all forms of new lending – fixes, trackers and standard variable rates – have all fallen since the start of this year.