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.