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Mortgage Lender Practices Regarding SVRs and Arrears

ended 30. August 2024

There is growing concern among brokers regarding the treatment of borrowers in arrears who are placed on Standard Variable Rates (SVRs) by mortgage lenders. Despite the Consumer Duty of Care and the Mortgage Charter, these borrowers often face the requirement to clear their arrears in full and maintain their account in good standing for a minimum of 6 to 12 months before being considered for better rates or products. This policy results in financially vulnerable individuals paying significantly higher rates at a time when they most need relief. With this in mind, a handful of Qs:

  1. Is the current approach of requiring borrowers in arrears to remain on SVRs for extended periods justifiable, or does it exacerbate financial hardship?
  2. What are the potential long-term impacts on borrowers who are unable to access more affordable mortgage products due to this policy?
  3. How could lenders better balance the need to manage risk with their duty of care towards financially vulnerable customers?
  4. Are there alternative strategies that could be employed by lenders to support borrowers in arrears while still protecting their own interests?

5 responses from the Newspage community

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Justin Moy
Managing Director at EHF Mortgages
This is a great example of where the disconnect between borrowers, brokers and lenders creates a terrible situation for distressed and potentially vulnerable borrowers, with some paying more than 9%. These same borrowers will go through the same circle of pressure in just a few months trying to pay rates nearly more than double market equivalent deals. If this is to allow borrowers to avoid Early Repayment Charges if they need to sell in the short term, it's an expensive way of providing this so-called flexibilty. Lenders should remove their 'Standard Variable Rate' altogether and revert to a base rate linked option, with a margin no more than 1%-1.5% above. Problem minimised.
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Simon Bridgland
Director at Charwin Private Clients
Being kicked whilst your down, would never be a nice thing, but for some borrowers being tied to a standard variable rate is more of a curb stomp, often shattering any hope of escaping spiralling debt caused by high SVRs. These borrowers usually have a lot of equity in their homes, and so could in better times, achieve rates close to half the amount of interest being charged. Arrears happen, often for reasons out of the borrowers control. Borrowers can hedge against certain events which cause hardship but not all, so some product innovation is required to provide a single premium insurance that the lender could claim on to pay the difference between new better rates and the standard variable rate. The premium could be an optional premium and added to the loan a little like a higher lending charge. Then upon claim the lender is compensated and borrower offered a better rate to help get things under control.
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Stephen Perkins
Managing Director at Yellow Brick Mortgages
This has always seemed nonsensical and unfair to me. Afterall, if a client is struggling, the cheaper the payments can be the more likely they can pay these and work on reducing the arrears balance, the risk was already accepted when taking on the client originally, so allowing a rate switch to a more afforable rate for the client should always be allowed.
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Michelle Lawson
Director at Lawson Financial
Standard Variable Rate really serves little purpose than a run off rate for most borrowers. For those that are in financial difficulty, to punish them further and not give them a safety net on what is likely their biggest expense, does nothing but exacerbate the problem. When a lender already has the risk, I can't see why the punishment for 'bad behaviour' is to offer nothing. All lenders should have a suitable suite of products under Consumer Duty. There are more people in financial hardship that ever before, attributed to Covid and also the recent cost of living crisis so how about we help them get out of their situation rather than continue to punish them further. Male suicide rates are at an all time high and this willl be a contributory factor for those that feel there is no alternative as rents are also so high now. Housing is in crisis and for an industry that is focused on mental health and vulnerable persons, this should also extend to consumers better than it does.
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Patricia McGirr
Founder at Repossession Rescue Network
Trapping financially vulnerable borrowers on punitive Standard Variable Rates is nothing short of a modern-day debtor's prison. It's a cruel irony that at the exact moment borrowers need a lifeline, they're instead handed an anchor. Requiring 6 to 12 months of ‘good behaviour’ after clearing arrears not only risks borrowers going straight back into debt, but flies in the face of the Consumer Duty of Care. Dealing regularly with homeowners in this situation, it’s hard to justify what is to be gained by continuing this outdated policy. Delinquent accounts costs the lenders and borrowers in fees, interest and inconvenience. Instead of pushing people closer to the brink, we should be offering immediate relief and tailored solutions that actually help borrowers recover. The question is, are lenders truly committed to their duty of care, or is this just another box-ticking exercise?