Is your lender taking the rise?
If your mortgage bill has increased too much, take action, says Stephen Pritchard
Wednesday 13 September 2006
The Bank of England's decision to increase its base interest rate to 4.75 per cent last month shocked few in the financial markets: the move was widely anticipated.
Home owners, though, might be surprised to find that their mortgages have increased, and in many cases, by more than the base rate. Those with standard variable rate mortgages have been the hardest hit.
Not only have standard variable rates risen in many cases by more than the 0.25 per cent increase in the Bank's base rate, but in many cases banks and building societies are now charging rather more for money than they were last time base rates were at 4.75 per cent, in 2005.
"Out of the 41 lenders we have surveyed, more than half have a higher standard variable rate [SVR] mortgage than they did last time the base rate was 4.75 per cent," says Melanie Bien, associate director of mortgage brokers Savills Private Finance. "This widening of margins on the sly is definitely something borrowers should watch out for and be on their guard against."
Savills has a point. SVR mortgages are already the most expensive way for a home owner with a decent credit history to buy a home. Only a sub-prime mortgage will cost more.
The latest round of increases only serves to underscore the high cost attached to SVRs. Moneyfacts, the financial researcher, points out that the average SVR now stands at 6.75 per cent, or 3 per cent higher than Bank of England base rates. Some lenders charge even more: the most expensive surveyed by Savills was Birmingham Midshires, at 7.09 per cent. Credit, though, should go to Leeds Building Society, which increased its SVR by 0.24 per cent, less than the base-rate rise.
What is happening with lenders' standard variable rates?
A handful of exceptions aside, most are going up. A couple of lenders, including NatWest and Royal Bank of Scotland, have put their rates up by 0.3 per cent rather than 0.25. Standard Life increased its rate by 0.31 per cent.
"Only a handful of lenders took advantage of the opportunity to increase by 0.3 per cent instead of 0.25 per cent," says Katie Tucker, mortgage specialist at John Charcol. "Lenders have kept largely the same rates as before: a clean 0.25 per cent down last time and the same 0.25 per cent up this time."
But lenders have moved their SVRs upwards to the point where most now charge more than they did last year when rates were last at 4.75 per cent. The Co-operative Bank put its rates up for existing customers by 0.25 per cent at the start of last month, and again after the Bank of England rise. Others, such as Nationwide, also now charge more than they did in 2005.
Is there an alternative?
No borrower really needs to pay their lender's SVR, mortgage experts point out. Standard variable rates are expensive, significantly more so than the best tracker and fixed rates. But they offer flexibility, because arrangement fees are low and there are usually no redemption penalties.
But an SVR mortgage is not the only way to avoid being locked in to a particular mortgage lender. There are tracker loans on the market without redemption penalties, such as Abbey's, which costs 5.24 per cent. This contrasts with the same lender's standard variable rate of 6.75 per cent.
For home owners coming to the end of a discount or fixed rate mortgage, the automatic option will be for the lender to switch them to an SVR. But unless the mortgage is very small - when remortgage fees could be an issue - a tracker will usually be cheaper.
Is a tracker always better value?
Trackers offer lower interest rates. For some best-buy mortgages, tracker rates are now lower than in early 2005, according to Bien.
Halifax now charges 0.19 per cent over base rates for its two-year tracker against 0.44 per cent in January 2005. Northern Rock charges 4.99 per cent, against 5.19 per cent in February last year.
Although tracker rates some lenders offer new customers are higher than they were 18 months ago, any rate changes will at least be set by the Bank of England, and not by your lender.
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