Millions face higher mortgage bills
Santander has joined a number of other providers in raising the rates on two of its mortgage products.
It has put up the rates by 0.1% on both its 60% and 75% loan-to-value two-year products for new customers.
The move follows similar announcements from NatWest/RBS and Halifax, which will see monthly mortgage bills increase for millions of people in the UK.
Customers with a NatWest/RBS offset mortgage have already seen a rise of 0.25% and from 1 May there will be rise of the same level for customers on the RBS One Account Mortgage. The increases will bring both rates to 4% – the same as the bank's standard variable rate (SVR) deal – which is set to remain unchanged.
Meanwhile, Halifax is due to increase its own SVR mortgage rate from 3.5% to 3.99% from 1 May, adding around £16.40 to monthly payments for around 850,000 customers.
The main reason given by the banks for the rise is increased costs associated with funding a mortgage and the higher interest rates being paid out to savers.
Mortgage rate rises
A spokesperson for Halifax said: "Throughout 2007, prior to tightening economic conditions, the average savings rate was 1.18% lower than the bank of England base rate.
"However, since 2008, the average savings rate is 1.27% higher than the base rate. This demonstrates the increased cost that banks must pay to attract retail deposits and longer-term funding costs are particularly high."
Grant McDonald, spokesperson for RBS/NatWest, echoed this sentiment: "Over the past year the cost of borrowing the funds we need to service our mortgage commitments has risen considerably. We have absorbed the cost during this period but have now decided to pass on some of this increase - 0.25% to our offset and One Account customers."
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.
A way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.
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.