Lender backtracks on 'rate shock' for new customers

Nationwide borrowers who face paying 60 per cent extra on their mortgage from March have been given fresh hope that their repayments will rise gradually rather than overnight.

In December, some 14,000 Bank of Ireland mortgage customers were transferred to The Mortgage Works (TMW) – part of Nationwide – after a deal that saw the ailing Irish bank forced to sell off assets.

As part of the move, affected borrowers on Bank of Ireland's standard variable rate (SVR) of 2.99 per cent were told they would see their rate soar 60 per cent to TMW's 4.79 per cent standard variable rate in March 2012.

But TMW has said it is considering moving rates up in stages rather than switching to the higher SVR instantly to "avoid a rate shock".

Letters have gone out to affected borrowers but details of when the change will start and how much extra borrowers can expect to pay are still thin on the ground.

Ray Boulger, the senior technical director at mortgage brokers John Charcol, said people need clarity. "I imagine many recipients will be very worried," he said. "A potential increase of this magnitude in only two months will be a massive shock."

Dominik Lipnicki, a director of mortgage advisers Your Mortgage Decisions, is equally concerned. "I struggle to understand how doubling someone's mortgage interest rate will not cause a rate shock even if done over many months,"he said. "A 1.8 per cent interest rate rise means a £200,000 mortgage will go up by £300 per month. This would be catastrophic for many households."

TMW said the average loan to value (LTV) of the transferred borrowers is 50 per cent, and at the time of the deal no borrower had missed a payment which should mean affected borrowers have more remortgage options.

David Hollingworth of mortgage brokers London & Country said many will question whether they could be better off looking for an alternative deal elsewhere.

"Although some of the lower standard variable rates for existing borrowers still stand up well, others are significantly higher and could be undercut by fixed or tracker deals," he explained.

A £150,000 repayment mortgage over 25 years on TMW's SVR costs £858.63 a month. The same mortgage would cost £672.17 at 2.49 per cent on HSBC's lifetime tracker – a saving of more than £185 per month.

So should borrowers on variable rates remortgage now?

Mortgage lenders' funding costs have been steadily rising as a result of uncertainty in the eurozone and are gradually starting to feed through into higher mortgage rates. Despite this, mortgages are still 0.81 per cent cheaper than in 2009 with the average 75 per cent LTV mortgage now available at a rate of 3.24 per cent.

Nigel Stockton, a financial services director at national mortgage broker Countrywide, said now is a good time for borrowers to review their options.

"Borrowers with a 40 per cent deposit preferring the comfort of a fixed-rate product can expect to pay rates of around 2.75 per cent, increasing to 2.99 per cent for borrowers with a 25 per cent deposit, while borrowers with up to 15 per cent deposit can expect to access mortgages at rates up to 3.84 per cent," he said.

Brian Murphy of mortgage brokers Mortgage Advice Bureau said it's a question of equity. For borrowers with less than 15 per cent equity staying on SVR even at the higher rate of 4.79 per cent still beats most alternatives.

"Even though the proposed SVR looks high compared to the starting position some borrowers will have little or no equity so may find it difficult to move anywhere at present," he explained.

For those with more equity in their home Steve Smith, a mortgage broker at Springtide Capital, said anyone on an SVR above 3 per cent at the moment should seriously consider remortgaging.

"Most commentators believe base rate will not increase in the near future, however once the economy shows signs of improvement, these opinions may change quite quickly," he said.

A spokeswoman from TMW said: "There will be every opportunity for these customers to move their mortgages to Nationwide in due course and we will be letting them know how they go about this."

Expert View

Ray Boulger, John Charcol

"If Nationwide wants to retain as many customers as possible, it will be in its interest to let borrowers know quickly their alternatives. How easy it will be to remortgage will depend on LTV, credit status and if borrowers are on interest-only deals. As TMW has said it will make a range of attractive deals available, some borrowers may be able to arrange a decent product transfer. Both this and the remortgage option need to be considered."