David Prosser: Why your mortgage bill is going up

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The Independent Online

Outlook Has your mortgage bill suddenly begun creeping up? If so, you are not alone – although the Bank of England base rate has remained at the historically low level of 0.5 per cent for a year now, many mortgage lenders have begun raising their interest rates.

Yesterday alone saw two lenders make a move on lending costs. Norwich & Peterborough Building Society raised its standard variable rate by 0.5 percentage points, while Halifax Bank began warning customers that should they choose to move home, they would not be able to continue paying its SVR.

They follow lenders such as Skipton Building Society, which last week said it was breaking its pledge to keep its SVR within 3 percentage points of the Bank of England rate. And a number of small societies raised their rates before Christmas.

Mortgage borrowers caught out by these increases are the latest victims of the credit crunch. Britain's largest banks are still finding it difficult to raise funds on the wholesale market so they've turned to savers instead. While the savings rates on offer on the high street right now might not seem generous, they're attractive given the prevailing base rate.

Smaller savings providers have felt compelled to compete with what's on offer from their larger rivals. And that is forcing many to squeeze their mortgage customers a bit harder.

The problem for lenders is that their conventional business model has been turned on its head. Traditionally, mortgage providers foughtfor new business with cut-price fixed or discounted rate deals that ran for short periods, subsidising these offers with earnings from existing customers paying their standard variable rate, typically much higher.

However, with base rates so low, it is proving impossible to lure customers off SVRs. Unable to find cheaper deals elsewhere, borrowers are staying put.

Usually, mortgage lenders would give almost anything for such customer loyalty. But with the need to compete so hard for savers there is almost no profit margin in these huge blocks of borrowers paying SVRs. For that reason, we can expect to see more increases in mortgage rates, even if the Bank of England's Monetary Policy Committee keeps the base rate on hold for some time.

One other by-product of the financial crisis is also affecting mortgage borrowers. Building societies such as Norwich & Peterborough claim they have been hit disproportionately hard by much higher bills from the Financial Services Compensation Scheme. The Government may yet succeed in getting its money back after the compensation it paid to British customers caught up in the Icelandic banking collapse. But mortgage borrowers have already begun to pay the bill.