Skipton announces shock SVR hike
Thousands of homeowners could see their mortgage repayments jump by more than £2,000 a year after Skipton Building Society confirmed it will hike the cost of its standard variable rate (SVR).
The building society, which is the fourth-biggest in the UK, previously promised its 100,0000-odd borrowers that its SVR would never be more than 3% above Bank of England base rate, currently 0.5%.
However, in light of “exceptional circumstances”, the mutual says it will remove this ceiling and raise the SVR to 4.95% from 1 March.
The move will add an estimated £180 a month onto the cost of a £150,000 interest-only mortgage. Borrowers who don’t pay by direct debit will see their SVR increase to 5.2% - 4.7% above base rate.
Why is Skipton increasing its SVR?
David Cutter, chief executive of Skipton, says increasing the SVR will help the society’s 850,000 savers – the “forgotten victims of the credit crunch”.
He adds: ““Our duty for 157 years has been to act in the long-term best interests of all our members - savers and borrowers. With base rate expected to remain low for some considerable period, we have reviewed our low SVR.”
Like many banks and building societies, Skipton is reliant on savers’ money for funding, and needs to compete with other providers in order to attract new customers.
Cutter also points the finger at government-backed National Savings & Investments, which in the past year has offered some market leading savings accounts.
This, he says, has driven up the cost of retail funding to an “unprecedented level relative to mortgage rates”.
Will other lenders change their SVRs too?
Hannah-Mercedes Skenfield, mortgage channel manager at moneysupermarket.com, believes other lenders could follow Skipton’s lead and increase their SVRs too.
"SVRs across the board have been at record lows for months now and the situation for lenders is obviously becoming untenable,” she explains. "[This move] is almost guaranteed to signal the start of SVR rate rises across the board - when one big provider moves, the others usually follow.”
Borrowers whose mortgages are from building societies are most at risk, as mutuals are under greater pressure to compete for savers’ deposits. If they want to increase savings rates, then that money has to be found from elsewhere in the business – in this case, SVR mortgage borrowers.
Skipton is not alone in increasing its SVR. Several small building societies, including Kent Reliance, have already increased interest rates. However, Skipton is the first player with an SVR ceiling in place to change this.
Elsewhere, Nationwide recently increased its SVR for new borrowers; so anyone taking out a deal now will pay 3.99% once this expires.
David Hollingworth, head of communications at London & Country, urges all borrowers to check what their current SVR is. "We recently launched a 'SVR watch' on our website, which allows borrowers not only to check their lenders' current SVR but also see how these have changed since the base rate fell to 0.5%," he says.
Is Skipton allowed to raise its SVR?
In a word, yes. Skipton’s terms and conditions state it may increase the ceiling on its SVT under “exceptional circumstances”. This is when the base rate is equal to or less than 2.7% and when base rate minus the UK average branch instant access savings rate is equal to or less than 2.5% for each of the three preceding months.
It must give 30 days’ notice of any changes to the ceiling.
How long will the change stay in place?
While it is impossible to predict what the future holds for interest rates, the cost of funding or the general economic recovery, Skipton predicts that “exceptional circumstances” will persist throughout 2010 and 2011, and could potentially last for longer.
It says: “While we are not under any contractual obligation to do so, we will voluntarily reintroduce the ceiling when exceptional circumstances have ceased to apply.”
What can I do?
Skipton has written to borrowers explaining the changes and outlining the impact on monthly payments. From 1 March, Skipton’s SVR will increase to 4.95% (or 5.20% for those who do not pay by direct debit).
"This is an increase of 1.45%, which will apply to all our SVRs but, as in the past, there is no guarantee that our various SVRs will change in line with each other in future," Skipton says.
If your mortgage is currently on SVR, then the interest rate will increase by 1.45% to 4.95% with effect from 1 March 2010. Your monthly payment will also increase accordingly.
Borrowers paying by direct debit qualify for a 0.25% discount from Skipton.
Skipton says it will give affected borrowers 90 days to redeem their mortgages free of charge, if they wish to. However, homeowners without enough equity in their property to remortgage have little choice but to put up with the increase.
Hollingworth says Skipton's SVR customers with enough equity to remortgage should consider moving onto a tracker rate mortgage. "While you will still be subject to the interest rate changing, it is currently possible to get a tracker deal paying 3% - so you can make a fair saving," he says.
However, bear in mind the cost of remortgaging - arrangement fees, for example - and remember that you will be tied into a new deal.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.