Santander Cuts “Revert-to” Rate by 1%
Written on 21 November 2023
From today Santander is reverting to its pre 23rd January 2018 policy for its “revert-to” rate by using a managed rate, SVR (standard variable rate), instead of a Bank Rate Tracker it called “Follow-On Rate”.
In theory a tracker rate is fairer for borrowers than a managed rate as instead of being at the mercy of their lender, the borrower knows that the rate is set by the market (in this case The Bank of England) and in a falling interest rate environment borrowers on a tracker rate always benefit as their rate is guaranteed to fall in line with any cuts in Bank Rate.
As Bank Rate fell to 0.5% lenders widened their margins and, whereas up to 2007 the typical spread between Bank Rate and SVR was around 2%, it widened to around 3.5% as Bank Rate fell.
By switching its revert-to rate to a tracker at a time when Bank Rate was 0.5% and lender spreads between Bank Rate and SVRs were around 3.5%, Santander effectively locked in the higher spreads for when ever interest rates rose. Hence, now Bank Rate is back to typical pre 2007 levels, spreads on revert-to rates directly linked to Bank Rate remained at elevated levels.
Santander’s “Follow-On” Rate was Bank Rate +3.25%, and so currently 8.5%, whereas its SVR is a whole 1% less at 7.5%.
Few borrowers actually pay a revert-to rate, at least not for long, as the vast majority of borrowers either effect a product transfer or remortgage when their current deal ends. Therefore the impact on Santander’s profits will be modest.
I suggest there are 2 main reasons why Santander has chosen to make this change:
- Consumer Duty puts pressure on lenders to justify they are offering good value throughout the whole term of the product and it is hard to justify a 3.25% margin over Bank Rate
- The FCA requires lenders to assess affordability on any new mortgage with an initial rate not fixed for at least 5 years by using a rate not less than its revert-to rate + 1%. Cutting the revert-to rate by 1% will give it the option of increasing its maximum loan on any variable rate mortgage and mortgages with a fixed rate of less than 5 years
When any major lender changes policy other lenders have to take notice, partly to maintain their competitive position, but also because no one wants to be an outlier when the FCA starts more actively reviewing revert-to rates as a result of Consumer Duty.
Therefore over the next few months I expect to see a raft of other lenders who have revert-to rates starting with an 8 or higher announcing reductions.
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