Low-interest silver lining losing its shine with increases on the horizon

The chances of the Bank of England raising interest rates over the next year are slim, suggesting variable and tracker mortgages linked to the base rate will remain cheap for some time to come. Yet several lenders have hiked their repayment charges in recent weeks and with experts predicting further uncertainty in the market, borrowers could face some tough decisions over the coming months.

Average fixed rate mortgage costs have been at record lows over the past 12 months. They fell to 3.83 per cent in October, according to Council of Mortgage Lender figures, compared with 4.3 per cent a year ago and 6.1 per cent in November 2008. Tracker rates are also at rare lows, at 2.73 per cent in October, and that month’s SVR rate of 3.29 per cent was lower than a year ago.

However, the latter figure has begun to edge up in recent months as lenders have reacted to the rising cost of interbank lending.

While the Bank of England base rate is unlikely to change for a year, that doesn’t dictate the costs facing lenders.

They are now governed more by libor (the London interbank offer rate), which is used to set SVRs and trackers and, fuelled by eurozone fears, hit a two-year high of 1.06 this week.

Woolwich, Nationwide Building Society, Santander, Clydesdale, Lloyds TSB and Bank of Scotland are among the big lenders to have increased mortgage costs lately. The average SVR for new customers with the main lenders is now 4.83 per cent, up from 4.66 per cent two years ago, according to Moneysupermarket.com.

Some of the biggest increases have been from brands owned by state-backed Lloyds Banking Group. SVRs for new customers with Bank of Scotland and Halifax rose from 3.5 to 3.99 per cent at the beginning of this year, following the jump from 2.5 to 3.99 per cent last year for borrowers with Lloyds TSB and Cheltenham & Gloucester.

Elsewhere, the Post Office has raised its SVR twice in the past two years, from 2.49 to 3.49 and then to 3.99 per cent. That’s despite claims that even though SVRs were already too high, even though they have been at record lows over the past three years.

More than a fifth of lenders have increased their SVRs since the base rate fell to 0.5 per cent in March 2009, while just 5 per cent passed on the full interest rate cuts to their customers, according to recent research by Which?, the consumer group. In most cases, the higher SVR has applied only to new customers, many of whom will only move on to it when their current fixed deal ends.

But the normal relationship between the Bank base rate and libor has fractured since the credit crunch began, pointed out Mark Dyason, director of broker Edinburgh Mortgage Advice.

“There is a growing threat as we teeter on the edge of another recession, that this relationship between the base rate and libor is about to break down again, with SVRs rising even though the base rate doesn’t,” he said.

The danger is that with mortgage criteria still tight, many borrowers – particularly those with little or no equity in their homes – will be unable to remortgage to a competitive fixed rate deal, meaning they are effectively stuck on SVRs even as they rise.

And when the Bank of England does eventually raise interest rates, some borrowers could struggle to maintain their repayments. Dyason said: “Unfortunately for some homeowners who bought at the height of the market, any equity they had in their properties has been eroded, so they are effectively trapped on the SVR rate with nowhere to go.”

But the good news for those who are in a position to fix their mortgage costs is that the deals currently available are among the cheapest in years. “For homeowners in a position to fix their mortgages and wanting the security of knowing what their monthly payments are going to be, this is a good time to make that decision because fixed rates are unlikely to get any cheaper,” said Dyason.

If you’re on a generous SVR of around 3 per cent or below, your chances of securing an equally cheap fixed rate deal are very slim. But if your lender’s SVR has edged up beyond 4 per cent and you have more than, say, 15-20 per cent equity in your home, it may well pay to look for a competitive fixed rate.

Two-year mortgages tend to be the most popular, but the most eye-catching rate cuts of late have been on longer term deals, with several lenders introducing lower five-year mortgages.

Lorraine O’Shea, director at Honour Financial Planning in Edinburgh, currently favours long-term fixed rates under 4 per cent and recently arranged a five-year fix with Nationwide at 3.79 per cent. “Staying on SVR at the mercy of a bank’s whim is not good advice in this climate. As libor increases, banks will want to improve their margins, so taking action where possible to guard against this is vital.”

Trackers remain an option, despite several recent increases. Loans that include the option to switch from a tracker to a fixed rate at a specific point will appeal to some borrowers in the current uncertain climate, according to Dyason. Several two-year tracker deals switch to fixed rates for three years at rates well under 4 per cent.

Clare Francis, spokesperson at MoneySupemarket.com, said: “For borrowers on the old and likely lower SVR, there may be little incentive to remortgage at the moment because the SVR is competitive compared with the rates on new mortgage products.

“Bear in mind however, that interest rates will start rising at some point and borrowers on SVR may see their mortgage rate go up by more than the increase in base rate.

“It could, therefore, be worth remortgaging now and switching on to a fixed or tracker, while rates are low.”