Page last updated at 10:49 GMT, Thursday, 21 January 2010

Mortgage lending up and Skipton raises rates

The housing market showed some recovery in 2009

Mortgage lending was "surprisingly strong" in December, but the figures came as one building society announced a sharp rise in rates.

The Council of Mortgage Lenders (CML) said UK mortgage lending increased by 14% in December compared with November, to £13.7bn.

But Skipton Building Society announced that thousands of its customers would see a hike in their mortgage bill.

It will raise its standard variable rate from 3.5% to 4.95% on 1 March.

It is removing the ceiling on the standard variable rate (SVR) that guaranteed the rate would be no more than 3% above the Bank rate - which is currently at a record low of 0.5%.

The building society - the fourth largest in the UK - said that it was enacting the clause in contracts which allowed it to remove the ceiling "in exceptional circumstances".

Some 29,000 Skipton customers will see rates rise in March, with another 35,000 on deals that will revert to the SVR in future months. Relatively few lenders have similar ceiling promises in place for existing borrowers.

Savers' demands

The chief executive of the Skipton Group David Cutter said that throughout 2009 the society had operated on an extremely low SVR, while trying to maintain returns for savers.

UK savers have been the forgotten victims of the credit crunch
David Cutter, Skipton chief executive

However, he said that this could not continue as the Bank rate continues to stick at 0.5%.

"Our duty for 157 years has been to act in the long-term best interests of all our members - savers and borrowers - and, with base rate expected to remain low for some considerable period, we have reviewed our low SVR," he said.

Traditional building society models see a direct link between the interest given to savers and the income from mortgage borrowers. The Skipton has 750,000 savers and 100,000 borrowers.

But Mr Cutter described savers as the "forgotten victims of the credit crunch".

"Their money is now in hot demand as banks - in particular those that have been nationalised or part nationalised - continue to reduce their reliance on the wholesale markets," he said.

"This, coupled with the rates payable by the government's National Savings and Investments, has driven up the cost of retail funding to an unprecedented level relative to mortgage rates."


The customers affected will receive a letter from the lender, explaining the decision. They will have a 90-day window to sign up for other Skipton fixed rate or tracker deals without having to pay the normal fee, although none of these rates are as attractive as the SVR.

Skipton Building Society sign
Skipton SVR customers were promised they would pay no more than 3% above the Bank rate of 0.5%
But their contact says this ceiling can be removed in "exceptional circumstances"
Skipton says the continued record low Bank rate and high funding costs are "exceptional"
The SVR will increase from 3.5% to 4.95% on 1 March

They will also be allowed to take 85% loan-to-value (LTV) deals, even if their LTV is above this level and so would normally be outside Skipton's lending criteria.

The exceptional circumstances being cited include the Bank rate being less or equal to 2.7%.

Another reason cited by the Skipton is if the margin between the Bank rate and the UK average branch instant access savings rate being less than or equal to 2.5% for each of the three preceding months.

"While we understand this change will be unwelcome for those borrowers who will end up paying more as a result, we hope that they will understand it is a necessary step that is in the best interests of our membership as a whole, and indeed the society itself, in the long run," Mr Cutter said.

The building society said it had never used the ceiling as a marketing tool to attract customers.

Mr Cutter said that market conditions were exceptional with high costs for funding mortgages, driven by "unprecedented competition" and "distorted markets".

Sue Anderson, of the Council of Mortgage Lenders, agreed that the climate was "very unusual".

"We have had a very low set of interest rates sustained for a long period of time. The wholesale markets are not really reopening," she said.

"This is creating a continuing pressure for lenders in terms of what is available for them to lend out. But even under the new regime, borrowers are still experiencing very low rates."

In general, many borrowers have chosen to revert to a SVR when their fixed rate deal comes to an end, rather than remortgaging, owing to the low levels of interest rates.

Lending figures

The latest figures from the CML show that UK mortgage lending was up 3% in December compared with the same month a year earlier.

CML economist Paul Samter said that the December lending figure was "surprisingly strong" as seasonal factors usually meant a slowdown compared with November.

"Evidence suggests that the rise was driven by a surge in house purchase completions," he said.

"The most likely explanation is that buyers of cheaper property wanted to complete their transactions before the end of the year to beat the end of the stamp duty holiday."

He predicted that the mortgage market would be stronger in 2010 than in 2009.

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