04 Feb 2010 Tell a Friend
Last week, Skipton Building Society used the small print in mortgage contracts to raise its Standard Variable Rate (SVR) from 3.5% to 4.95%, breaking a guarantee to its customers. To put this into perspective, this amounts to a monthly repayment increase of around £120 for a homeowner on a 25-year £150,000 repayment mortgage.
The trend began with Marsden Building Society at the start of the year, and since then, in addition to Skipton, Norwich&Peterborough and Holmesdale Building Societies (to 5.35% and 4.89% respectively) are among those who have announced an SVR hike. More building societies are expected to follow in their footsteps.
Naturally consumers are angry - you simply don't expect a guaranteed maximum payment to be exceeded. But the building societies must have their reasons for risking losing a number of their customers, right? We look at the reasons behind the SVR increases, and what you can do about it if your mortgage rate has become unmanageable.
What is the Standard Variable Rate?
The Standard Variable Rate (SVR) is the 'default' rate of interest that banks and building societies charge customers for borrowing. The SVR is different at every lender, and the lenders can change the rate at any time. Normally, the SVR reflects changes in the Bank of England base rate, although lenders are under no obligation to track the base rate if they choose not to.
If you have been on a mortgage rate with an attractive introductory offer, such as a fixed rate mortgage for say, the first three years of your deal, you would automatically revert to the lender's Standard Variable Rate mortgage product once this fixed rate period is up. In most cases, the lender's SVR is much less competitive than their other mortgage products - after all, new consumers cannot get these rates, so they have no incentive to make them sexy.
How can these building societies change a 'guaranteed' rate?
Even when there are guarantees against raising the SVR above a certain percentage, there are usually clauses in the small print stating that this guarantee can be withdrawn in 'exceptional circumstances'. These could include any circumstances in which the lender's business may be put at risk, and in the current economic climate - with interest rates at unprecedentedly low levels - many other smaller building societies could use this reasoning to increase their Standard Variable Rate.
Why are the building societies doing this?
For the smaller building societies, the majority of their customers are on tracker rate mortgages, which will mean relatively low monthly repayments whilst the base rate remains at 0.5%. The smaller building societies are therefore working on very tight margins where it comes to their lending.
All of the banks and building societies need to attract savers, because these are the consumers that bring regular cash flow into the business. And if smaller building societies are unable to attract new savers because they cannot afford to pay competitive interest rates on savings, they need to find some way of bringing in some extra cash. Although the tracker mortgage rates cannot be put up, the SVR can be changed at any time, and so this is how the small building societies have had to adjust their rates to counteract their earlier low-rate lending.
What can you do about it?
If you are on your lender's Standard Variable Rate at the moment, you can choose to remortgage and find a better deal elsewhere. Choosing a fixed rate remortgage would at least guarantee that the rate would not be able to rise for the period of the remortgage loan, guaranteeing you a higher level of financial security.
The only reason this may not be an option is if you do not have any equity available in your property, as this would make it harder for you to actually improve your rate by moving. However, there is no harm in shopping around to find out whether you could improve your current mortgage situation.
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