No excuse for the rise

Personal Finance
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The Independent Online
The rise in mortgage rates that is about to hit home owners might have been postponed until the next time the Chancellor increases interest rates if there was no annual review system.

Mortgage lenders were not exactly enthusiastic about increasing rates at a time when the housing market is in the doldrums and borrowers are about to suffer an increase of £10 a month in the cost of their mortgage as a result of the Budget cut in tax relief.

The only thing that could spur them into action, we were led to believe in December, was a threat to their savings balances.

That could come about by the Government increasing rates on National Savings to help the inflows to the Government coffers, or a rise in savers' rates from the banks.

Neither happened. Yet the Halifax felt it "had'' to increase mortgage rates and will later put up savers' rates.

The only explanation lies in the timing of its annual payments review. At the end of January every year, 1.1 million of its 1.8 million borrowers have their payments set for the next 12 months. While they are subject to every change in the variable rate,their payments will not change. If there is any over or underpayment, the difference is taken into account when the next year's payment level is fixed.

If they overpay, they are paid no interest. If they underpay, they are not liable to pay interest on the underpayment. So you can see that when rates are rising, there is an incentive to keep borrowers' payments in line.

The societies talk about wanting to ensure that there are no payment shocks for borrowers who do not like to see a steep rise in their payments. But they would rather see no increase at all.

Now all the other lenders (with the exception of mutual-minded Newbury and Cheltenham & Gloucester) feel they have to follow suit to ensure their savers do not desert them for higher rates at the Halifax.

So somehow it seems all the lenders feel forced to put up rates when the evidence of any real force is missing.

Peter Lilley has said he is determined to bat on and cut down the entitlement of home owners to mortgage payments when they are claiming income support.

While lenders have protested vehemently that this will lead to people losing their homes and to a more conservative lending policy, the minister seems certain that privatising this benefit is the way forward.

Some lenders, notably the Abbey National, have managed to persuade a good proportion of their borrowers to take out the cover voluntarily. Now other lenders are also making an effort to promote the cover and are even offering it those who are not their customers.

Birmingham Midshires' openly available policy at £6.66 per £100 of monthly payments would cost just over £21 a month for a £45,000 mortgage - rather more than the £12 a month quoted by the minister for a £46,000 loan.

The problem with this type of mortgage insurance cover has always been the long list of exceptions. So students, the self-employed and those on contracts found it almost impossible to claim.

A new generation of policies will surely be offered by lenders who stand to gain a double benefit: protection of their payments and the chance to earn commission from selling the policy in the first place.

If they are to gain any voluntary acceptance, however, they must provide genuine cover for all those who part with premiums.

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