Don’t panic, homeowners told as mortgage rates rise

Homeowners facing higher mortgage payments in the wake of rate rises announced by major lenders have been told not to panic as fears grow over further increases.

Royal Bank of Scotland, Halifax, Santander and Bank of Ireland have all announced mortgage rate hikes in recent days that will affect more than a million borrowers.

The changes follow a rise in the cost of lending between banks, and with more lenders expected to follow suit, the end result could be higher repossessions and fresh falls in house prices.

Halifax – which north of the Border offers its mortgages through Bank of Scotland – is raising its standard variable rate (SVR) from 3.5 to 3.99 per cent from 1 May.

A borrower with a £150,000 repayment mortgage over 25 years faces paying almost £40 a month more for their loan as a result of the move, which will affect some 850,000 customers.

The Halifax – owned by taxpayer-supported Lloyds Banking Group –m is also lifting the rate on two other products from 3.4 to 3.89 per cent.

The news was confirmed on Monday, the third anniversary of the Bank of England lowering the base rate to 0.5 per cent.

It came days after Royal Bank of Scotland, 83 per cent owned by the taxpayer, increased the rate on two of its loans from 3.75 to 4 per cent, hitting some 200,000 customers.

Another Scotland-based lender, Clydesdale Bank, yesterday announced that its SVR will rise from 4.59 to 4.95 per cent from 1 May, a move adding up to £30 a month to repayments for thousands of customers.

This week Bank of Ireland announced that its SVR will rise 2.9 to 3.99 per cent by June and then to 4.49 per cent in September, signalling a sharp rise in payments for around 100,000 UK customers. Elsewhere, Santander has increased the rates on four products sold to new borrowers through intermediaries by 0.1 per cent.

The increases on SVRs – to which borrowers switch when their fixed or tracker deal ends – have attracted heavy criticism, particularly for the state-backed banks.

Yet with the cost of lending between banks (the London interbank offered rate, or Libor) going up in recent months, the increases had been anticipated.

Robin Purdie, director of Mov8 Financial in Edinburgh, said it had been only a “matter of time” before lenders made changes.

“Other lenders may follow suit, but for those borrowers with Nationwide and Lloyds Cheltenham & Gloucester this should not be too much of a problem if they are on the ‘old’ SVR as there is a caveat stating that their rate will never be more than 2 per cent above the base rate.”

Paul Diggle, property economist at Capital Economics, warned that recent wholesale funding costs increases mean further mortgage hikes are likely. “Up till now, lenders have been willing to absorb most of the spike in funding costs, perhaps hoping it will prove temporary. But with the eurozone crisis only set to deepen, wholesale costs will remain elevated, forcing lenders’ hands.”

There are serious concerns that higher mortgage repayments could push some borrowers over the edge at a time of rising unemployment, wage freezes and steep household bills. Even a small rise could pose a threat to borrowers struggling to maintain their payments, with a potential rise in repossessions among the implications.

“Of the ten million outstanding mortgages at the time, it only took an additional 60,000 annual possessions between 1989 and 1991 to help drive house prices down by an eventual 20 per cent,” said Diggle.

He is not alone in pointing out the potential repercussions for the wider housing market.

Nigel Lewis, property analyst at FindaProperty.com, said: “Against a backdrop of an already struggling property market, rising mortgage fees and with the end of the stamp duty holiday looming, this latest revelation spells yet more bad news for what is a very sensitive property market.”

But the Council of Mortgage Lenders (CML) has downplayed fears that higher repayments could trigger a fresh crisis.

It claimed that should interest rates rise in line with expectations over the next year, 85 per cent of borrowers reverting from fixed to variable rate deals would still be paying less than their original fixed rate.

So what should you do if your mortgage costs are going up? If you have a broker it’s worth discussing your options with them first.

The biggest problem is faced by those with little equity in their homes – or even in negative equity – as it’s harder to secure an affordable deal.

“They may only have options with their existing lenders and not the whole market,” said Purdie “Other considerations will be for those who currently have interest-only mortgages, as this type of lending is now more or less confined to 75 per cent loan-to-value.”

Some borrowers with little or no equity may find they have to stay where they are, warned Lorraine O’Shea, director at Honour Financial Planning, putting them at the mercy of further SVR hikes.

“They will have to get used to paying more. Some lenders will be better than others in terms of offering alternative products which may not be lower than the SVR but at least allow some people to move on to a tracker or fixed rate.”

There are plenty of competitive fixed rate mortgages available, particularly for those with 25 per cent or more equity in their home. But Purdie advised against taking the first low fixed-rate product you find.

“Consider any arrangement fees as well as an admin fees to redeem their existing mortgage,” he said. “Any good broker will consider the options available via the existing lender first, then compare these to the rest of the market.”

However Clare Francis, mortgage spokesperson at Moneysupermarket.com, believes anyone on their lender’s SVR should consider remortgaging now.

“With the base rate expected to remain unchanged for the foreseeable future, some may be willing to stick with a variable rate deal. If this is the case, a tracker is a safer option than a discount because tracker mortgages are directly linked to base rate and changes will mirror the movement of the base rate.”

Fixed rates are the best bet for those wanting protection against future rate increases,

Deals fixed for five years are especially popular right now, according to Francis.

“The risk of going for a shorter-term fix is that the fixed period could end as interest rates are rising, so you could find yourself having to remortgage when rates are higher than they are at the moment.”

O’Shea agreed: “I think long-term fixed rates are the way to go – five years minimum.”