On Wednesday, Skipton Building Society made a shock announcement that means 1,000s of its mortgage customers will see their monthly repayments go up by £100s. But what's changed and more importantly, how will if affect you?
What's changing?
Until now, the majority of customers sitting on Skipton's SVR (Standard Variable Rate), or those with a discounted or tracker deal, have been safe in the knowledge that their rate will be capped (or tracking) at a maximum of 3% above the Bank of England Base Rate, thanks to the mortgage ceiling written into their contracts.
This has meant that Skipton's variable rate mortgage customers have been enjoying an enviably low SVR of 3.5% since the Bank of England Base Rate fell to 0.5% in March 2009. However, the Skipton have now announced that they plan to break this SVR mortgage guarantee.
They will be increasing their SVR to 4.95% - that's an increase of 1.45% over and above the 3.5% rate that fits with their current Base Rate promise.
When will the increase take effect?
The Skipton will make the SVR increase official on 1st March, 2010. After this date your monthly mortgage payments will increase automatically to reflect the change.
Who will it affect?
In the first instance this change will affect Skipton customers whose mortgages are either following the building society's SVR or are linked to it in some way (for instance those on tracker or discounted mortgage deals). Skipton estimates that 29,000 customers will see their monthly mortgage payments increase as soon as the change takes effect.
In the longer term, customers on fixed rate deals will be affected by the increase once these deals come to an end and their mortgage reverts back to Skipton's SVR.
What does it mean for me?
If you're a Skipton customer and your mortgage is either following, or linked in some way to the building society's SVR you will see your mortgage repayments increase by 1.45% from the 1st March, 2010. The Skipton will write to you explaining exactly how this increase will affect you and informing you how much your mortgage repayments will rise by.
However, to give you an idea; repayments on a £150,000 interest only mortgage with 20 years remaining will increase by £181.25 a month, while a repayment mortgage for the same amount will increase by £115.86 a month.
What are my options?
If you're one of the customers affected you will have 90 days during which you'll be able to move your mortgage without penalty. As such it's wise to start looking around for a better deal right away.
Why are they doing this?
Unlike banks who can raise funds by appealing to share holders, building societies are dependent on the profit margin between their earnings from mortgages and loans and the interest they pay out on savings.
With the Base Rate - and therefore their variable rate mortgage deals - at an all time low, the amount they're getting in from mortgage repayments simply isn't keeping up with what they're having to pay out to keep their savings customers happy. Consequently, they've decided to increase their SVR so as to increase their profit margin.
Are the Skipton in trouble?
The Skipton have said that they are not facing a funding crisis and that they are still financially stable. However, with the current market conditions looking set to remain static for the next couple of years they have decided to take this action so as to protect the finances of all of their customers and the future of the building society.
Are they allowed to do this?
Frustrating as it seems, Skipton are well within their rights to break their SVR promise. This is all down to an 'exceptional circumstances' get-out clause that's been written into mortgage contracts since 2002. Until this week they had never publicly defined exactly what qualifies as 'exceptional circumstances', for the simple reason that they never expected to invoke the clause.
Now, however, they have defined this rather vague term as the following:
- The Bank of England Base Rate is less or equal to 2.7%.
- The Bank of England Base Rate minus the average instant access savings rate is less or equal to 2.5% for at least 3 months.
Skipton have confirmed that their previous 'mortgage ceiling' gurantee will remain invalid as long as either of these conditions apply. However, they have also said that they will reinstate the SVR cap as per the previous agreement when the conditions are no longer met.
