Santander has written to customers on its standard variable rate (SVR) this week telling them that the rate will jump from 4.24 per cent to 4.74 per cent from October. This will be unwelcome news for those who are already stretched financially and don’t have enough equity in their homes to enable them to remortgage onto a cheaper fixed or tracker rate.
Santander follows several other lenders, including Halifax, Clydesdale and Yorkshire Banks, who all raised their SVRs in May. The average SVR is now 4.23 per cent, according to the Bank of England, making Santander’s new rate look expensive. Borrowers may be bemused as to why their rate is going up when interest rates haven’t moved but this has always been the problem with SVRs – lenders can raise them as, and when, they want.
While this extended period of low interest rates – three and a half years without an increase from 0.5 per cent – is welcome news for homeowners on variable mortgage rates, it is an expensive headache for lenders. There is little incentive for borrowers to remortgage at the end of a fixed or discounted period if the alternative is a lender’s cheap SVR with no arrangement fee, early repayment charge or loan-to-value stipulation. It’s no wonder lenders want borrowers to move off them. Hiking them is one way of doing this.
But not everyone is able to remortgage. If your lender raises its SVR, the usual advice is to switch to another deal but many borrowers won’t be able to as they have become mortgage prisoners. They don’t have enough equity in their home, have an interest-only mortgage, or their circumstances have changed since they first took out their mortgage, so they no longer meet lenders’ criteria.
If you are in this situation, seek advice. Use savings earning next-to-nothing in terms of interest to pay down your loan and improve your equity position, making it easier to remortgage. Ask your lender whether it will offer you another deal, particularly if you will struggle to pay the higher rate.
And for those borrowers whose SVR has not yet gone up, be vigilant. Unless you have a guarantee that it won’t, such as those borrowers with Nationwide and Lloyds TSB who can be charged no more than 2 per cent above base rate – you are at risk of higher monthly payments.