ROOF Blog

Tens of thousands of borrowers face a shock jump in mortgage payments after Skipton Building Society confirmed plans to raise its standard variable rate from 3.5 per cent to 4.95 per cent. The move, to take effect from 1 March, will raise mortgage repayments by up to 40 per cent for some borrowers, adding almost £200 a month to repayments on a £150,000 interest-only loan. Skipton, Britain’s fifth-largest building society, with 100,000 borrowers, previously had guaranteed that its variable rate would not rise while Bank of England base rate stayed at 0.5 per cent, but it has cited a clause in its loans’ small print allowing it to ignore the promise in ‘exceptional circumstances’. Skipton has blamed its decision on ‘unprecedented’ competition in the savings market from National Savings & Investments (NS&I), the Treasury-backed savings provider, and state- controlled banks. Experts say that other building societies are likely to follow suit and raise interest rates for homeowners on an SVR, the ‘revert’ rate that borrowers switch to when a mortgage deal ends.

Banks were today accused of profiteering from homeowners during the recession, as it emerged that the average interest charged on variable-rate mortgages is 4.2 per cent higher than the Bank of England’s base rate.

The average Standard Variable Rate mortgage now charges interest rates of 4.7 per cent, down only one per cent over the past year – when the base rate fell by 2.5 per cent. Vera Cottrell from consumer watchdog Which? said the variable rate market was ‘raising serious concerns’.

She said: ‘Lenders are getting away with charging very high mortgage rates right now, many have an incredibly high margin between base rate and the interest being charged. That’s offering consumers a poor deal.’

Fitch, one of the world’s most influential ratings agencies, said that the reforms proposed by the Financial Services Authority (FSA) could result in higher costs and greater inefficiencies in the mortgage market.

The rating agency said the FSA’s Mortgage Market Review ‘could have negative financial implications for mortgage customers instead of the intended benefits’.

Fitch said its concerns were specifically around the proposals for arrears management, which it said were too prescriptive and would take away ‘flexibility’.

Robbie Sargent, director in Fitch’s European structured finance operational risk group, said:

‘The assessment of borrowing capacity, and disposable income, along with the verification of income for all applications, will require a detailed methodology, and in all likelihood, the provision of some form of manual underwriting for all loan applications.

‘This will almost inevitably lengthen the mortgage application process and push up costs for the lender, which may in turn be passed on to the borrowers in the form of higher interest rates and/or product fees,’ said Sargent.

The Financial Services Authority (FSA) has called the buy-to-let market ‘unsustainable’, with high incidences of mortgage fraud and arrears a major reason for them to act as regulators.

If buy-to-let remained outside its remit, borrowers who were turned down for residential mortgages – which are already regulated and will be subject to tougher rules under the FSA’s proposals – may try to obtain unregulated buy-to-let loans instead; a process it called ‘gaming’.

The FSA said: ‘Bringing buy-to-let within regulation…would address an identified risk to market sustainability, strengthen oversight arrangements and offer the potential for protecting consumers making investment decisions on property’.

Extending the FSA’s scope to include buy-to-let mortgages would require approval from the Government.

Borrowers have been warned of soaring mortgage fees after the Financial Services Authority (FSA) called for lenders to assess income and spending in greater detail before approving loans.

Lenders are already under fire for introducing application charges of up to £1,000, which you lose if you back out or the loan offer is withdrawn – a problem not uncommon in today’s mortgage market.

Brokers say that plans by the Financial Services Authority (FSA) to make all borrowers pass an ‘affordability test’ that scrutinises their spending habits mean that fees could go even higher.

Savills Private Finance broker Melanie Bien said: ‘Any step-up in regulation means more cost, and higher costs tend to be passed on to consumers.

‘Lenders are likely to favour higher charges over the alternative option of increasing interest rates as it is a less visible way of raising costs.

‘This will be unhelpful, especially for first-time buyers, for whom every penny counts.’

The City watchdog’s proposals for the mortgage market received a cautious welcome from the industry today. But trade bodies expressed concerns about how some of the Financial Services Authority’s (FSA) measures would be implemented, as well as the impact a ban on self-certification mortgages would have on certain borrowers. Paul Broadhead, head of mortgage policy at the Building Societies Association, said: ‘We need a sensible balance between appropriate regulation and allowing people to buy their own home when they can afford to do so.’ The Council of Mortgage Lenders said the FSA seemed to believe that regulation could not rely on borrowers behaving in their own interests, but that consumers instead needed measures to be introduced to protect them from themselves. However, Shelter, the housing and homelessness charity, called on the FSA to implement the changes it was proposing urgently to ensure the ‘dark days of reckless lending never return.’

Research out today has found first-time buyers are taking out loans to afford the deposit. Thirteen per cent of 18- to 34-year-olds are considering buying a property for the first time in the next year, but of those, 16 per cent say they will consider taking out a loan to cover the deposit. Critics have warned that it is a ‘dangerous move’ and have called for lenders to assess the affordability of a mortgage on a case by case basis. The average deposit for a first-time buyer is £32,000.

Meanwhile, the Organisation for Economic Cooperation and Development said yesterday that financial service firms must make sure their customers understand what they are letting themselves in for when signing up for mortgages, consider loans and other products. The OECD has just released new guidelines designed to avoid a repeat of the sub-prime mortgage crisis and subsequent credit crunch that caused the worldwide recession.

Borrowers with tracker or variable rate mortgages have benefited from a 17 per cent fall in the cost of owning a home in the past year. However, everyone else including tenants and those on fixed rate deals, have faced an increase of 4.5 per cent in the cost of household expenses. Energy costs rose by 13 per cent, water by 5 per cent, council tax and domestic rates by 3 per cent and the cost of repair work by 5 per cent, but for borrowers whose mortgage repayments have fallen these increases have not be enough to offset the 47 per cent they saved on interest repayments, the average mortgage rate falling to 3.62 per cent in April this year, from 5.8 per cent at the same time last year.

The (RLA) is warning buy-to-let investors that lenders may try to change their borrowing rates as property values fall. The RLA says some mortgage agreements allow lenders to alter their rates if the loan to value (LTV) changes significantly. Alan Ward of the RLA said lenders may look for large repayments of capital as well as charging more expensive interest rates.