Hike in mortgage interest rate spells danger for variable mortgage borrowers

One mortgage lender has just increased its SVR by 41%, despite guaranteeing borrowers it wouldn't raise its rates. It says it was forced to do so due to 'exceptional market conditons'. That spells danger for mortgage borrowers everywhere...

Skipton Building Society has announced it will increase its standard variable rate (SVR) by 41%, from 3.5% to 4.95%, despite guaranteeing its borrowers that the SVR would never go higher than three percentage points above Base Rate -- currently 0.5%.

The fifth largest building society in the UK is invoking a clause in its contract that says it can rip up the mortgage guarantee in exceptional circumstances -- which it claims it now finds itself in.

The lender will impose the increase from 1st March, leaving many borrowers having to scrimp to meet their monthly repayments.

What will it cost borrowers?

A borrower with a 25-year £150,000 repayment mortgage on Skipton's SVR will see their monthly repayments increase from £750 to £873. That's £123 extra to find each and every month, an increase of £1,496 a year.

In total over 60,000 of the society's 100,000 borrowers are likely to be affected.

Why, why, why?

The lender blames the unprecedented current economic climate, record low interest rates and the need to protect savers.

It claims it is responding to exceptional market conditions that have seen Base Rate remain at a 315-year low of 0.5% for 11 months. It also pointed to unusually expensive retail funding (relative to mortgage rates) driven by 'unprecedented competition and distorted markets'.

Skipton did say it would try to reinstate the 3% guarantee when conditions improve, although experts reckon this could take years.

Mutuality under threat

While Skipton is in the firing line today, its decision reflects problems that many building societies are trying to cope with in the credit crunch and recession.

Six other building societies have had to increase their SVRs, or introduce new rules, since Base Rate has been steady at 0.5%.

Even mutual giant Nationwide introduced a higher SVR for new borrowers because its guaranteed Base Mortgage Rate was simply costing it too much at 2.5%. Borrowers who took out a deal with the lender from the 30th April 2009 onwards will revert to its new SVR of 3.99%, which comes with no guarantees.

The recent mergers of building societies highlights the immense problems and pressures the sector is facing. Make no mistake, Skipton knows that this move flies in the face of the principles of mutuality and fairness, but it had no choice because it must attract savers.

Battle for savings

Building societies are losing the hard-fought battle for retail deposits -- they have been hemorrhaging deposits for almost a year as banks have worked hard to get hold of our rainy day money. The mutual sector cannot compete.

Skipton group chief executive David Cutter said that UK savers have been the forgotten victims of the credit crunch. He pointed the finger squarely at the State-owned banks, which have been especially competitive in the savings arena, offering higher rates than Skipton and others can afford to.

To put it simply, Skipton cannot balance its books if it offers decent savings rates while maintaining such a low SVR.

What about the new SVR?

The size of the increase in SVR from 3.5% to 4.95% is significant, but how does it compare to the rest of the market?

Skipton is at pains to point out that it's still lower than the average SVR of the top 10 building societies at 5.12%. This is true and it is significantly lower than the SVR across the whole mortgage market which is 6.43%, according to financial information provider Moneyfacts.

But hang on a minute.

Mortgage borrowers are not split evenly across all lenders and such comparisons do not reflect the SVRs that most borrowers would revert to.

In fact, according the Council of Mortgage Lenders, the biggest five lending groups were responsible for three-quarters of new lending in 2008 (the latest figures). And their SVRs are generally much lower, as the table below highlights:

*Now Abbey and A&L have rebranded as Santander, new borrowers will revert to Abbey's 4.24% SVR.

**This is not technically an SVR but a tracker pegged to the Barclays Bank Base Rate, but it is the lender's 'revert to' rate for fixed rate borrowers

What next?

It is likely that other building societies, and maybe even banks, will now follow Skipton and put up their SVRs to allow them to compete for savers' deposits. However, it's unlikely the state-owned lenders will go for such an unpopular move (right before an election!).

For Skipton borrowers it's time to decide whether or not to jump ship. Those with plenty of equity in their homes (25% for example) will have plenty of mortgage choices and can easily get a new deal at less than 4.95%. So they will probably remortgage away. Those without equity, or without 10%, will be stuck with the new rate, which is still OK compared to new deals on offer up to 90% loan-to-value.

It's those inbetweeners who will really have to do their sums to work out whether it is worth sticking put or remortgaging. Skipton has confirmed that borrowers whose mortgage terms included the SVR ceiling will be given 90 days to redeem their mortgage free of charge. But you will still have to pay arrangement fees with a new lender and you will have to take that into account when you are doing your calculations.

Finally, if you are thinking of remortgaging from Skipton's SVR remember this could be a good opportunity to lock into a fixed rate deal to protect yourself from future rising interest rates.

Here at lovemoney.com, independent mortgage advisers are on hand to explain to any Skipton borrowers what your options are. The service is free of charge and our fully qualified brokers will advise you on the best course of action.

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