Warning over shock rises in mortgage costs

Borrowers with discounted rates, lifetime guarantees and tracker mortgages could be hit hardest. Photograph: Esme Allen

MORTGAGE borrowers have been told to brace for an increase in costs that could leave some trapped in expensive deals as lenders prepare for an interest rate hike.

The warning came as the City regulator suggested that it could limit the extent to which lenders can alter mortgage contracts when interest rates increase.

It will also look at the way lenders communicate changes to borrowers, as part of an assessment of the fairness of mortgage contracts.

The move comes a month after the Bank of England hinted that interest rates could begin to climb later this year. It had been expected to leave the base rate at 0.5 per cent until at least next spring, but its suggestion that a rise could happen sooner rather than later has already driven mortgage costs up.

Several lenders have axed their cheapest deals over the past fortnight, sending up the cost of two-year fixed rate deals in particular. The lowest two-year fix for a borrower with a 20 per cent deposit is now 2.24 per cent, Moneyfacts figures show, up from 1.99 per cent a month ago.

Industry insiders warn that more lenders will increase their mortgage rates over the coming weeks as the uncertainty triggered by the Bank of England pushes up the cost of borrowing.

Now the paper launched by the Financial Conduct Authority (FCA) has further underlined the threat facing mortgage borrowers, with many facing the prospect of becoming “mortgage prisoners”.

It said it had been contacted by lenders wanting to discuss changing their standard variable rates (SVRs) or making other amendments to mortgage deals. But the regulator expressed concern that some borrowers may be hit unfairly by such changes if their lender hadn’t made it clear that it could take such action.

Borrowers with discounted rates, lifetime guarantees and tracker mortgages could be hit hardest, as the contracts often include terms that allow the lender to change or “switch off” those facilities. While mortgage changes may be legitimate, said the FCA, it is asking for views about whether they are fair to consumers.

Some borrowers could face a shock hike in repayment costs if they were unaware their lender could alter the terms of their deal.

The regulator’s move is likely to be influenced by the controversy that erupted earlier this year when Bank of Ireland increased its base rate tracker. Some 13,500 UK borrowers were hit by the change, which exploited a clause in their mortgage deals allowing the lender to hike their rate after a guarantee period had expired.

The furore was a reminder of the importance to borrowers of knowing what their lender can and can’t do, said Alison Mitchell, mortgage expert at Edinburgh IFA Robson Macintosh.

“Lenders need to make sure that what is acceptable and what is not is set out clearly so that borrowers can understand it and not just be referred to the finer print,” she said. “People should be told at the outset about possible variations, such as changes to a fixed rate contract partway through the term, changes to the SVR or changes to a feature of that contract, so that they are as prepared as possible.”

She advises borrowers to make sure they aren’t overstretched financially as a possible rate increase approaches. “I always ensure that my clients can afford the mortgage now but also in the future, based on the lenders’ SVRs, as these are invariably a lot more expensive,” said Mitchell.

Some SVRs are as much as 3 percentage points higher than the current fixed rates on offer, with many lenders failing to reduce their rates fully when the Bank of England slashed interest rates in 2008 and 2009.

But lenders are unlikely to be so slow to act when the Bank raises them again, warned Mitchell.

“Review your circumstances as goals may change, and make sure you understand the possible scenarios,” said Mitchell. “None of us has a crystal ball, but do whatever you can to minimise any shock in the future.”