"Generally speaking, everyone is more interested in doing nothing than doing anything." —Gertrude Stein
It is doubtful that Stein, a leading American poet and writer of the early 20th century, was referring to mortgage lending in the UK when she wrote about the temptation of inactivity, but this sentiment arguably sums up the default position of lenders with regard to over a quarter of a trillion pounds of SVR back books.
And no wonder, as these customers typically pay higher interest rates (published data for a major lender used to illustrate the point):
• October 2008. Base rate: 4.5%. Average SVR: 6.50%.
• May 2012. Base rate: 0.5%. Average SVR: 3.99%.
• September 2015. Base rate: 0.5%. Average SVR: 3.99%.
Having been defined by its "stability" in recent years, the SVR back mortgage book, which in value terms represents over a quarter of outstanding mortgages, is undoubtedly a prime target for brokers and lenders alike, given these customers have both a proven track record and falling loan-to-values against a backdrop of strong house-price inflation.
With intense competition and the prospect of (multiple) Bank base rate increases at some point during 2016 and into 2017, many of these customers might simply "vote with their mortgage" and avail of better deals elsewhere (Nomis research indicates this could be up to 20% of the SVR book for some lenders).
The traditional default position of most lenders of "doing nothing"—or just about nothing—is no longer tenable. After all, standard variable rate mortgages do not even feature as a product on offer from most lenders!
In reality, while existing lenders are happy to compete aggressively for new business, they can't afford to unilaterally bring down the charging rate for existing customers. Lenders also need to be cognizant of other factors at play in the consumers mind, including attitudes to rates, fees, flexibility, the lender’s brand and indeed reputation.
To address this challenge, lenders with a significant proportion of their back book on SVR need to determine which borrowers are most at risk of leaving and offer an appropriate product based on a real understanding of needs and preferences, if they are to minimise pre-payment risk and a reduction in their assumed return on mortgage assets.
Identifying customers at risk is complicated by the fact that it is dependent on many exigent circumstances, including the lender’s planned policy response to changes in the Bank base rate. Moreover, crude loan-to-value segmentation is not in itself enough to determine the propensity for a borrower to leave. Experience shows that customer defection is the outcome of a complex series of circumstances and priorities including, but not exclusively, price sensitivity.
It is also important to understand factors such as the relationship of the borrower with the lender, their level of financial sophistication, their channel preferences and their disposition to take expert advice. In reality, if a lender doesn't have insights on the drivers of mortgage customer behaviour, it will be difficult to offer solutions which will secure a high level of customer take-up and ultimately protect their earning assets.
