Rate hike hits mortgage borrowers
More than 100,000 homeowners will be hit with a huge increase in their mortgage payments after the Bank of Ireland and Bristol & West both raised their standard variable (SVR) rates from 2.99% to 4.49%.
The move follows the example set by Halifax, which increased its SVR from 3.5% to 3.99% several days ago, and the Royal Bank of Scotland and NatWest, which both raised their SVRs by 0.25% to 4% for offset mortgage customers.
The SVR is the interest rate your mortgage will be sat on if your initial fixed or tracker deal has ended and you haven't remortgaged. The rises have come as a shock to borrowers as many believed that lenders wouldn't raise SVRs unless there was a rise in the base rate.
Lenders are saying they have had to raise their SVRs due to a rise in the cost of funding loans. There are two factors affecting this.
Firstly, Libor (the rate at which banks lend to each other) has been steadily rising over the past two years, and up until now the banks hadn't passed this on to borrowers.
Secondly, the Bank of England's special Liquidity Scheme, which provided emergency mortgage funding to banks during the credit crunch, is closing. This means that the banks are having to return to the retail and wholesale markets to fund their mortgage books, and those markets are far more expensive.
The Bank of Ireland, which owns Bristol & West, has stated that the rate rise will take place in two stages with the SVR rising to 3.99% in June and then in September it will hit 4.49%. The bank also provides home loans to Post Office customers, but they will not be affected by the rise.
A borrower with a £150,000 interest-only mortgage with the Bank of Ireland would see their monthly payments rise from £374 to £561 following the rises. While payments on a 25-year repayment mortgage for the same amount would rise by £125 per month.
If you are affected by the rise in SVRs, or are worried that you soon could be, there are steps you can take to protect yourself. If you are in a position to remortgage then check to see if you could get a lower rate of interest on a fixed or tracker deal.
If you can't remortgage, due to having very little or no equity built up in your home, and are worried you won't be able to meet the new repayments speak to your mortgage provider as soon as any increase in SVR is announced to discuss your situation and what can be done.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
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.
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.
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.
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.