The secret mortgage rip-off

Mortgage lenders have been cheating borrowers paying variable rates!

Between October 2008 and March 2009, the Bank of England's base rate collapsed from 5% to 0.5%.

As a result, banks, building societies and other lenders could borrow money at much lower rates. This greatly improved their profit margins and helped them to weather the global financial crash of 2007/09.

Turning the screw on homeowners

As the base rate nose-dived, banks and building societies were quick to slash savings rates. However, they were deliberately slow to pass on these reductions to borrowers.

Indeed, according to the consumer champions at Which? Money magazine, 95% of all UK lenders have failed to fully pass on cuts in the base rate to their standard variable rate (SVR) borrowers. (An SVR is the bog-standard rate charged by lenders to those mortgage customers not on special-rate deals.)

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In addition, more than a fifth of lenders have increased their SVRs while the base rate has been stuck at 0.5% -- its lowest level since the Bank of England was founded in 1694.

The SVR trap

Usually, SVR mortgages tend to rise and fall in line with changes to the base rate. However, sly lenders tend to increase SVRs quickly, but drag their feet when it comes to passing on rate reductions.

The problem for many SVR mortgage customers is that, thanks to a lack of equity in their homes, large numbers are unable to switch to better deals. Thus, when the base rate eventually starts to rise in 2011/12, these borrowers are going to be hit hard.

For example, suppose the base rate were to rise from 0.5% to, say, 2.5% over the next two years. This increase of two percentage points would add £3,000 a year -- or £250 a month -- to the cost of a £150,000 interest-only mortgage. Borrowers unable to afford these higher monthly repayments could fall into arrears and, eventually, face losing their homes.

Sky-high SVRs

These six lenders have the highest SVRs among mainstream UK lenders, according to Which? Money:

* Formerly Kent Reliance BS

** Some deals revert to 6.14%

As you can see, these small building societies are charging astronomical margins over the Bank of England's base rate. The buffers range from 5.45% at Marsden BS and Darlington BS to 5.58% at KRBS.

Which? Money found that the average SVR is now 3.48% above the base rate, compared with 1.95% in September 2008. In other words, lenders have exploited the falling base rate to massively boost their profit margins.

Amazingly, KRBS's SVR of 6.08% is nearly 12.2 times the base rate, which is nothing short of daylight robbery.

The great SVR rip-off

Small building societies may have one excuse for keeping their SVRs high. They cannot borrow at the ultra-low rates the UK's biggest banks grab in wholesale money markets.

Nevertheless, some of the UK's very biggest lenders are in on this 'great SVR rip-off', as my second table shows:

Ten common SVRs

1. Some borrowers pay lower rates linked to the base rate.

2. Some borrowers qualify for a 'loyalty rate' of 4.54%.

3. Borrowers who applied for mortgages before 01/06/10 pay 2.5%.

4. Borrowers who took out mortgages before 01/01/11 pay 3.5%.

5. Borrowers who reserved mortgages before 30/04/09 pay 2.5%.Over 90% of Nationwide's SVR borrowers are on this rate.

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As you can see, this table includes some of the UK's very biggest lenders. These include several divisions of the 'Big Four' banks (Barclays, HSBC, Lloyds and Royal Bank of Scotland), plus Spanish-owned Santander and Nationwide BS (the UK's biggest building society by a mile).

Despite being able to borrow cheaply in wholesale markets, these lenders all charge SVRs of between 3.69% (at First Direct) and 4.99% (at Barclays/Woolwich). Even Northern Rock -- which is 100%-owned by taxpayers -- charges a scandalous SVR of 4.79% (4.29% over base rate).

The average SVR charged by these ten top lenders is 4.19%, or base rate plus 3.69%.

It's clear to me that almost all lenders are guilty of swindling their SVR customers. After all, if the tiny Stafford Railway BS is able to charge an SVR of 3.49%, what possible reasons could bigger lenders have for charging far, far more?

Raising their rates

What's even more scandalous is that 16 lenders have actually had the nerve to raise their SVRs since March 2009, a period during which the base rate has been stuck at 0.5%.

Here are these offenders, which consist of 15 building societies and specialist lender Accord (sorted from biggest to smallest SVR increase):

As you can see, most lenders have raised their SVRs by 0.5% or less since March 2009. However, Skipton BS takes the biscuit with its 1.45% hike, followed by Manchester BS and Accord, both of which hiked their SVRs by 0.65%.

The average SVR charged by these 16 lenders is 5.37%, which is double the best fixed and discounted rates on offer to new borrowers and remortgage customers. What a right royal rip-off!

The mortgage meltdown

To be frank, Britain's lenders -- especially the biggest -- have been greedily gorging on the fattest lending margins ever seen in banking history. As a result, millions of borrowers -- particularly those unable to remortgage or move to another lender -- are being taken for a ride.

Worryingly, above two-fifths of all borrowers (over 40%) are paying their lenders' SVRs. Thus, when the base rate starts to rise, millions of borrowers will suffer, especially those on SVRs or with variable rates linked to the base rate, such as tracker mortgages.

Higher rates mean higher repayments and, in turn, these raise mortgage arrears and create more repossessions. Hence, when the base rate starts to rise, lenders must not be so swift to raise rates as they have been in the past. Otherwise, they will face a huge backlash as many mortgages go bad.

Homeowners paying SVRs of up to 6% are being royally ripped off. They should start looking around for a better deal right now, as switching rates or lenders could save hundreds of pounds a month! If you're currently shelling out on an extortionate SVR, why not head over to our mortgage centre where you can compare the best deals in the market today. You can also pick the brains of our fee-free mortgage team, whether over the phone, by email or via instant messenger.

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