I bet you think I am mad writing this…
Hear me out.
Last week I was talking to one of our account managers at a building society. He was telling me that building societies (not banks) have to have a percentage of their lending on variable rates. Im not sure what the percentage is, but it appears to be around 30-40% which is a fair old percentage.
Rate rises
With interest rates seemingly going up daily it seems like a crazy idea to even consider variable rates doesnt it? I thought exactly the same and since around March this year we have been doing more 5 year fixed rates than I think we have ever done.
Why variable rates?
It turns out that variable rates are typically linked to the lenders Standard Variable rate (SVR) which typically is linked to the bank of england base rate. However, this is not always the case. The account manager I was talking to was telling me that despite the recent rate rises, they have only increased their SVR rate once for 0.25%. The other rises they have not passed on.
It also turns out that they are not the only building society to not pass on the rate rises. This is because they need to try and keep a good portion of their customers on variable rates due to regulatory obligations.
The future of variable rates
We were discussing ideas on how they can make variable rates more appealing. We had 2 ideas:
- First time buyers – offer a decent amount of cashback. This can help with the cost of living or helping to furnish/decorate the new home.
- Adverse customers – this is obviously our strong point so we had to raise it. If you have the choice of a fixed rate at 6% or a variable rate at say 3.5% or 4% would that be enough of a discount to make you look at variable rates? I think it could help to make a dent.
Looking into the second option in more detail…
Lets assume the rate is 4% on a variable rate and the alternative is a 6% fixed rate. If the variable rate stays at 4% for 12 months and then jumps to 6%, you are still quids in. Realistically they are not going to raise rates 2% overnight as that would be very bad publicity in the press. That means there is an element of security as well as savings to be had.
Summary
Hopefully you no longer think I am mad. Nothing has happened yet, but it appears that it might not be long before we start to see more variable rates and aggressively priced.
Food for thought though. Would you consider it?