Skipton mortgage rate increase set to raise cost of borrowing as lenders strive to attract more savers

News - Savings

Written by Ray Clancy

Friday, 22 January 2010 09:14

The shock decision by the Skipton Building Society to increase the rate of interest paid on Standard Variable Rate mortgages could prompt other lenders to raise rates as they strive to attract savers at the expense of borrowers, it is claimed.

Skipton, the UK’s fifth biggest building society, announced earlier this week that it is set to increase its SVR rate from 3.5% to 4.95% from March 01, ripping up an agreement that this rate would not be more than 3% above the Bank of England base rate.

It said ‘exceptional circumstances’ forced it to renege on the deal with thousands of loyal mortgage customers. This included expensive retail funding and high levels of competition within the industry.

Skipton Group chief executive David Cutter said that the SVR used throughout 2009 was exceptionally low and helped borrowers through the worst of the recession. However, in order to get good returns for its savers, the building society needed to increase the SVR to benefit all of its customers.

But even although two lenders responded by reducing their mortgage rates, experts fear that the decision by Skipton will result in higher rates for borrowers across the board. Even although taxpayer-owned Northern Rock and the Post Office both launched a range of cheaper mortgage deals yesterday, the bigger players did not respond.

The Bank of Ireland, which offers mortgages for Post Office customers, dropped the cost of both its lifetime tracker deals from 3.29% to 2.99% and from 3.59% to 3.49% depending on the size of customers' deposit. Bank of Ireland also dropped its competitive five-year fixed rate by 0.5% to 5.25% at the same time.

Northern Rock, which is publicly-owned, has also tweaked its rates. It has a two-year fixed rate deal of 3.69%, down from 3.89%.

But Skipton is not the only lender putting up rates, according to moneysupermatket.com. ‘Skipton is not the first to raise its SVR. Some of the smaller building societies did this towards the end of last year, although Skipton is clearly one of the more prominent players,’ said Hannah-Mercedes Skenfield, mortgage channel manager.

‘SVRs across the board have been at record lows for months now and the situation for lenders is obviously becoming untenable. Although Skipton says they will reintroduce the SVR ceiling when these exceptional circumstances improve, it’s likely this won’t be for some time. We’ve been living in exceptional circumstances for months, and there is an argument to say we’re over the worst so Skipton’s timing is puzzling,’ she added.

There are also concerns that other lenders might not follow the example of Northern Rock and the Post Office, and increase rates as well.

Skenfield believes more rises are inevitable. ‘It is almost guaranteed to signal the start of SVR rate rises across the board as when one big provider moves, the others usually follow. Lenders, and particularly building societies, are facing a battle for savers’ deposits and they will argue the margin on their SVR does not allow them to adequately service their borrowers and their savers, and unfortunately it’s homeowners who are drawing the short end of the stick,’ she explained.

‘The traditional model has been turned on its head over the past year. It used to be the case that when deals expired, borrowers automatically moved to what was a higher SVR but base rate languishing on 0.5% for the past year has meant it's often been cheaper to move to an SVR. Lenders will undoubtedly be trying to move away from this model and we can see that already with the fact rates for new borrowers are on the decline.

‘SVRs have provided somewhat of a haven for cash-strapped homeowners over the past 12 months, but homeowners relying on the safety net of a low SVR could now find themselves stranded. It’s absolutely vital that borrowers with an SVR deal remain vigilant, especially over the coming weeks when we could see more of the same from other lenders,’ she added.