Variable rate mortgages have become something of a contentious issue in the UK in recent times.
Fos received 80 complaints against West Brom Mortgage Company for the year up until 26 May alone, from customers claiming that the lender unfairly increased the rate on their buy-to-let tracker mortgages, according to search results from the online database of Fos decisions.
All the complaints were rejected by Fos.
In January, the same lender won a case in the high court in a dispute over its contractual right to vary the interest rate payable by the borrower and to terminate the mortgage on notice.
A letter dated 6 June 2008 – which concerned a loan offer of £90,299 for 25 years – stipulated that the claimant would pay a rate of 6.29 per cent until June 2010, when he would pay the Bank of England base rate in addition to a 1.99 per cent premium until the term end.
However a clause in an accompanying document said interest could vary according to changes in the law or market conditions.
The issue over high variable rate mortgages is one that is also pertinent over the other side of the Celtic Sea.
Feargal Quinn, independent senator of Seanad Éireann (upper house of the Republic of Ireland) recently announced he would introduce a bill to allow the ECB to cap the interest charge on variable rate mortgages.
According to data released by the Central Bank of Ireland, the variable rates on new mortgages – excluding renegotiations – averaged at 4.13 per cent in the first quarter of this year. The figure was even higher at 4.24 per cent in the fourth quarter of 2014.
This is understood to be more than the eurozone average, which is often quoted to be around the 2 per cent region.
Bank of Ireland and Permanent TSB have notably come under increasing pressure to reduce their rates.
BoI and PTSB made cuts to their variable rates early in the year but only for new customers – while existing mortgage holders are still paying some of the highest rates in the Irish mortgage marketplace, north of 4 per cent.
Michael Noonan, Ireland’s minister for finance, is a political figure often cited as the man looking to take the fight to the banks over the issue, and recently arranged a meeting with the chief executives of six banks.
He said: “I outlined my view, that standard variable rates being charged in the Irish market are too high.
“There was agreement from all lenders that customers should have access to more competitive mortgage products as per my recommendation.”
The UK marketplace has also enjoyed low base rates set by the Bank of England – albeit at a higher level of 0.5 per cent compared to the ECB’s 0.05 per cent.
The BoE cuts to interest rates resulted in a number of lenders who had implemented a cap to SVR to reconsider their position.
In 2010, Skipton Building Society removed the ceiling, which had ensured the majority of borrowers with SVR-linked accounts could not pay more than 3 per cent over the base rate, and hiked rates to 4.95 per cent.
The argument that Skipton and other building societies cited was that they would be unable to compete with nationalised banks which were able to offer headline savings after being strengthened by taxpayer money, whereas societies were reliant on wholesale markets.
Nationwide, on the other hand, introduced a new rate of 3.99 per cent for new customers but honoured its base mortgage rate of 2 per cent above the base rate for existing borrowers – costing the society a lot of money, according to David Hollingworth, associate director at London & Country Mortgages based in Somerset.
He said: “When base rates began to plummet, some of the cuts were passed onto borrowers by some but not all lenders.
“There was a dislocation between funding costs and base rates. As a result, lenders were not in a position to pass on the fall in base rates.”
In a letter to bank bosses in 2013, the City watchdog recognised the argument posed by the building societies, but warned against unfair hikes in SVRs.
The monthly average of UK resident banks and building societies’ sterling standard variable rate mortgage to households was recorded as 3.56 per cent from 31 December 2014 to 31 March, according to statistics released by the BoE.
However, there are still lenders that are charging between 4 per cent and 6 per cent, according to Ray Boulger, senior technical manager at John Charcol, who added that lenders were not necessarily ripping customers off and had a commercial prerogative to set SVR to the levels they deem necessary.
He said: “Some customers may feel remortgaging would be unnecessary because their mortgage balance is so low and it is not worth the hassle or cost involved in remortgaging.
“Many will not meet the remortgage criteria, while others will not have enough equity in their house to command a cheaper rate of between 5 and 6 per cent when it comes to remortgaging.”
With SVR reaching up to 6 per cent in the UK, was there a need to introduce legislation to allow the BoE to cap the interest charge on variable rate mortgages, akin to the bill being discussed in Ireland?
Mr Hollingworth did not think so, claiming that there was enough competition in the marketplace to squeeze down rates. He said: “Looking at the SVR is one thing, but you must also look at the business rates. Lenders are offering great rates for fixes as well as strong tracker rates.”
Mr Boulger agreed. “I think the more regulation you have the less choice you end up with for consumers. Some regulation is clearly needed but regulating things like price has never been successful in the past – any impact tends to be short term,” he said.
He added: “A better way of giving consumers better value is competition, and there is an awful lot of that in the UK market. There are between 70 and 75 lenders in the marketplace and the number is much smaller in Ireland.
“There could be a need to regulate price in smaller markets, but in the UK, I would like to see more regulation on criteria.”
The senator’s Bill puts pressure on the Irish government and the bank to take action to force the banks to lower the SVR to an acceptable level, but whether or not the bill will be passed into law remains to be seen.
In the UK, a rise in base rates, which is predicted to happen sooner rather than later, gives rise to the possibility of even higher SVR.
Mr Hollingworth said: “It will be interesting to see if lenders will increase their base mortgage rates. I predict that they will initially, but will rein it back later.”
PTSB declined to comment.
A spokesperson for the Bank of Ireland said that the meeting between Richie Boucher, its chief executive and the Irish minister for finance was a “a constructive and professional engagement”.
He added: “Bank of Ireland keeps its product and pricing propositions under constant review, in line with its strategy of seeking to mitigate interest rate risk for customers and the Bank.”
Myron Jobson is a features writer of Financial Adviser
Key points
Fos received 80 complaints against West Brom Mortgage Company for the year up until 26 May alone.
The Irish finance minister will introduce a bill to allow the ECB to cap the interest charge on variable rate mortgages.
There is enough competition in the UK marketplace to squeeze down rates.
