New Santander borrowers to be moved to alternative SVR

Christina Hoghton
Written By:
Christina Hoghton

Santander mortgage customers will be moved to a new alternative Standard Variable Rate (SVR) when they come to the end of a fixed or tracker rate period. The bank is not changing or scrapping its current SVR, but adding a second Standard Variable Rate to its range.

The new rate is currently considerably lower than the current SVR, but could the dual rates cause confusion and inertia when it comes to switching to better deals?

Anyone who applies for a mortgage from Tuesday 23 January onwards will be automatically moved onto Santander’s ‘Follow-on rate’ (FoR), rather than its SVR, once their fixed or tracker rate deal ends. Existing borrowers and those who apply for a mortgage before 23 January will be placed on Santander’s SVR when their current mortgage deal comes to an end.

The FoR is a variable rate that tracks at 3.25% above the Bank of England Base Rate (currently 0.5%) for the term of the mortgage, so this new rate currently stands at 3.75%.

In contrast, Santander’s SVR (which isn’t pegged to the Bank of England Base Rate) is 4.74%, meaning the alternative rate is nearly 1% lower.

Divide, confuse and conquer?

A standard variable rate is the lender’s default rate applied when a customer comes to the end of their mortgage deal, which is typically higher than the mortgage fixed rate or discounted rate.

Critics point out that running an SVR and an FoR (effectively a second SVR) concurrently creates different ‘classes’ of customer and serves to confuse borrowers.

Santander argues that it is not operating two standard variable rates as one is an “off sale SVR” while the other is the “Follow-on Rate”.

It added that its consumer research showed that more people understood the FoR than the SVR.

A spokesperson, said: “When any product changes are introduced, there is sometimes a period of slight overlap, when one product ends and another begins, but in time, current customers will move on to the Follow-on Rate at the end of the product term unless they select an alternative new product.”

However, Rachel Springall, finance expert at data site Moneyfacts, said the alternative could “complicate things”.

She said: “It’s positive to see the FoR set lower than Santander’s SVR, but existing borrowers may feel deflated that they missed out on this launch.

“The FoR alternative could complicate things, people know what a fixed rate is, what a standard variable rate is – but adding in other rates might make it problematic for borrowers to compare with other deals and they may get confused about how a rate is impacted by an interest rate rise or fall.

“The FoR does work like an SVR, except it has been confirmed that it will be guaranteed to track all changes in base rate and whilst this is positive for any fall, it is largely expected for rates to rise in the foreseeable future.

“Customers must be sure to keep their paperwork at hand if they are thinking of switching either direct or via a broker so that they know exactly what rate they are on or will be moving onto.”

If you were already thinking of applying for a Santander mortgage, it may be better to wait until 23 January. However, this dual rate might also cause borrowers forced to pay the higher SVR to feel aggrieved.

In 2002, a number of mortgage lenders, including Nationwide Building Society and Halifax, attempted to introduce so-called ‘Base Mortgage Rates’ lower than their SVRs for certain groups of customers. A combination of Ombudsman’s orders and bad publicity led to the lenders compensating many thousands of borrowers to the tune of milllons of pounds.