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Homeowners hit by rate rises as lenders recoup their costs

Lenders such as Lloyds-owned Cheltenham & Gloucester and Nationwide are hitting mortgage borrowers with unexpected interest rate rises despite this week's decision by the Bank of England to hold base rate at 0.5%.  


Borrowers are up in arms at an unexpected hike in their mortgage rate. There has been a raft of increases for homebuyers on lenders’ standard variable rate as many of the banks and building societies continue to lose money on these loans. Some are citing 'exceptional circumstances' to break what is, in some cases, a contractual agreement. 

Lloyds Group and its subsidiary Cheltenham & Gloucester has just introduced a new ‘homeowner variable rate’ at 3.99% for all new mortgages taken out from 1 June. New borrowers will also suffer from the removal of the guarantee that the SVR will never be more than 2% above Bank of England base rate. Existing homebuyers on SVR will continue to pay at just 2.5%.


Homebuyers are, not surprisingly, complaining at these increases. But lenders are losing substantial sums of money on SVR loans. Base rate has remained at an unprecedented low of 0.5% since March of last year – which they had never foreseen – so the increases are hardly surprising. About 1,500 C&G customers who took out a tracker mortgage pegged at 1.01% below Bank base rate have been paying no interest at all on their home loans since March 2009 – clearly not a situation that was sustainable.

‘The new rate balances the needs of our customers with the commercial needs of the business,’ explained Stephen Noakes, Lloyds Banking Group’s commercial director of mortgages. ‘In the light of market conditions, particularly ongoing higher funding costs, we have introduced this rate for new mortgages only.'

The Lloyds increase follows news that Nationwide’s decision to stick to its promise of the cap on its SVR for existing borrowers has cost it over £450 million in the last twelve months. An estimated 500,000 Nationwide customers out of a total of 1.4 million are paying the lowest SVR in the market at 2.5%.  In April of last year Nationwide increased its SVR for new borrowers to 3.99% while existing borrowers who took out a mortgage before 30 April 2009 remain on the old SVR of 2.5%. 

No let out for letters

But even Nationwide, the largest mutual in the country, has found the losses unsustainable. Some Nationwide homebuyers will face mortgage rate increases of 1.5% and higher charges as the lender attempts to recoup some of the losses.

Homebuyers with a normal owner-occupier mortgage who decide to let out their property for more than three years will see the interest rate on their loan jump by 1.5%. On a £200,000 loan this will add £3,000 a year to repayments or £250 a month and they will have to pay a new £50 when they inform the lender of the change.

Given that most buy-to-let mortgages are on average more expensive than residential loans and currently stand at 5% or more, this is a reasonable way of recouping some of the losses sustained on SVR lending – although Nationwide customers are unlikely to be so magnanimous. Other charges include a £50 fee for switching from capital repayment to interest-only monthly payments and a £20 fee for extending the term of a loan. Charges will also rise for homebuyers who default on their monthly repayments.

Nationwide has written to all its customers setting out the new charges, which will take effect for new customers from September while the higher interest rate for customers with a residential mortgage who have rented out their homes for three years will only come into effect in December.

A spokesman for Nationwide justified the increases saying, 'we have reviewed our charges and are bringing ourselves in line with other banks in the market. We found that the fee structure in place wasn't covering the costs which we were incurring. In a members'-based organisation, that meant those costs were being borne by the wider member base.’ 

It could be worse

If Nationwide borrowers are feeling hard done by, they should bear in mind that many homebuyers are paying SVRs in excess of 6%.  Chesham Building Society has the highest SVR at a massive 6.45% and many borrowers would be very happy to be paying 2.5% or even the 4% the new rate that Nationwide borrowers will pay if they let out their property. 

Since the beginning of the year there have been many increases particularly among small building societies. In January Marsden building society increased its SVR by 0.46% to 5.95% and Mansfield building society hiked its SVR by 0.35% to 5.59%. Other lenders who have increased their SVRs include the Ipswich, Skipton, Scottish and Cambridge building societies and Accord Mortgages, most of which are well over 5%. Norwich & Peterborough, for example, has increased its SVR to 5.35% from 4.85%.

In many cases the increase in SVR reflects the higher rate the deposit takers have to offer savers in order to refinance existing lending. Higher SVRs also act as an incentive for homebuyers to remortgage with another lender – although some borrowers won’t have enough equity in their homes or investment properties to remortgage at a better rate.

7 comments so far. Why not have your say?

Geof Wassell

Jun 12, 2010 at 11:22

Going for the soft targets again. It really is a pity that the financial institutions dont face up to their own lack of spine and sack the incompetant people who went for the easy options which caused the financial upheaval in the ffirst instance instead of awarding themselves further rewards for more of the same.

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Andrew McDonald

Jun 12, 2010 at 11:32

How can the government sit by and watch this happen.

These mortgages were taken out with fair agreements, just because the economy has changed how does that enable the banks to change their lending terms?

If it was the other way round i could hardly see the bank offering to refund customers as they were making too much money....


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richard hickman

Jun 12, 2010 at 11:43

How can a major institution afford to subsidise its borrowers at the expense of its investors. Its about time they subsidised the pensioners who have to keep their hard earned cash in savings accounts that earn negative real returns, whilst the poor old mortgage borrower revels in cheap, subsidised, money, with an almost guaranteed capital return.

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Ian McCann

Jun 12, 2010 at 12:28

They quote exceptional circumstances as a reason for breaking the contracts with their customers. Irrelevant!

Customers with a long established record of paying their mortgages properly now finding they have lost their jobs, overtime incomes or their businesses are now struggling, due to the exceptional circumstance of a world-wide economic catastrophy caused by the financial institutions wreckless dealings.

These customer could easily claim exceptional circumstances as a reason for paying less than contractually required or even halting payments for the duration of the exceptional circumstanceses. How is it that the excuse is only applicable to those with the big legal team and the whip hand and not to the bullied victim?

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Angry pensioner

Jun 12, 2010 at 17:57

Just explain why those who have the money, the savers who have tried to look after their future,should subsidise the speculators, who have no money and need to borrow. Why should you have our money and pay NOTHING for it.

We need to return to the real world !

Would any of the wingers moaning about their repayments like to let me borrow money from them for nothing !

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The Astrologer

Jun 13, 2010 at 09:16

Some commentators above need to get real. Equitable Life went under when many members held it to a stupidly devised guaranteed return contract. Obviously someone was stupid in devising tracker rates at 1% below bank rate, but if a BS continues with these sort of terms (i.e. receiving no interest at all) either everyone else's rates will have to rise disproportionately or the BS or bank would ultimately go into liquidation. Then no doubt, as happened with Equitable Life, these same people will start blaming the regulator and will want the government (i.e. the rest of us) to pay them compensation.

Isn't it the case that any mortgage can become instantly repayable on demand? All banks have to do is wind-up the uneconomic mortgage deals and re-offer them on current commercial terms.

I really feel for anyone struggling to repay a mortgage due to current circumstances......... but that doesn't entitle them to special rates at the expense of other borrowers or savers. Too many people have paid too much for their property and that in turn is going to increase the pain all round as the debts and over values unravel.

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Jun 14, 2010 at 08:31

Good. Time to return to the real world.

It was excessive borrowing that got us into this mess, and we won't get out of it until we've had a proper deleveraging process. And yes, this will lead to home 'owners' being repossessed. Tough. They borrowed money they couldn't afford to repay, and they still can't afford to repay it at proper commercial rates. The people on these ultra-low rates are spongers, just like dole scum - they're just sponging off of responsible savers like myself rather than the taxpayer (although some of them are doing that as well!).

I don't care how many people lose 'their' homes. If you can't afford to pay for something at proper commercial rates you have no right to own it. And I don't care what effect it has on house prices. I'm a home-owner (mortgage-free) and really couldn't give a monkeys what my house is worth - I need it to live in, and will be happy living in it if it's worth £10!

The party's over. The last government gave us the hair of the dog, and it worked for a while. Now it's time for the hangover. Get used to it!

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