Hidden rise which means borrowers pay even more

It came as no surprise this week that millions of mortgage holders were hit with an increase in their borrowing costs, with many lenders quick to pass on Thursday's interest rate rise.

But looking closely, it appears that several leading banks and building societies have been putting the squeeze on some of their borrowers by using sleight of hand to make them cough up more.

This week saw the Bank of England lift interest rates to 4% - the first increase since November, when rates rose for the first time in almost four years.

That means the base rate is now the same as it was at the very end of 2001 (it was cut from 4.5% to 4% in November 2001). But the standard variable rates (SVRs) of several lenders are higher now than they were then. In other words, even though the official cost of borrowing is the same, many mortgage customers are forking out more now than they were then.

Of the three lenders we looked at, this differential is biggest at Nationwide building society. It announced this week that its standard rate, the "base mortgage rate," which about 500,000 borrowers are on, is going up by 0.25% to 5.14% with effect from March 1.

Yet at the very end of 2001 Nationwide's base mortgage rate stood at 4.74%. This difference can partly be blamed on its decisions to hit its borrowers with a higher than average 0.35% hike last November, and to pass on only 0.1% of July 2003's quarter-point rate cut to them.

But Nationwide can't really be criticised too heavily because its new base mortgage rate is still about 0.85% lower than many of its major rivals, assuming they replicate this week's rise.

Northern Rock's standard variable rate is going up by 0.25% to 5.99% - yet back at the end of 2001 it was 5.85%. So why are its SVR borrowers paying more now than then?

A spokesman replies: "Tracking the base rate is not what it's about". He says the Bank of England base rate is one of a number of factors taken into account along with things like what competitors are doing, adding that the number of people on the standard variable mortgage rate is reducing all the time because of its policy of allowing them to switch into any product available to new borrowers.

The Woolwich is another one where there is a differential. It has upped its SVR to 6.04%, but a look back to December 2001 reveals it was 5.95% then. It points out that many people are increasingly opting for products such as trackers, fixes and discounts.

We checked with financial data provider Moneyfacts and, sure enough, the average existing borrower SVR at the end of December 2001 was 5.57%. The average at the close of play on Wednesday was 5.61% - and that's before this week's increases are taken into account.

Abbey (formerly Abbey National) appears to be an exception to this trend. Its SVR is going up by 0.25% to 6%, which is slightly less than the 6.1% it was charging at the end of 2001.

Simon Jones at mortgage broker Savills Private Finance isn't surprised by the findings. "Lenders are faced with a lot of costs this year as far as regulation is concerned. We seem to be going through a bit of a cycle of people pushing margins up again."

This week's move means monthly payments on a typical £80,000 repayment loan will rise by about £12, assuming the full 0.25% rise applies.

Consumers' Association magazine Which? says: "If you're paying the standard variable rate, you can switch cheaply and easily and save hundreds of pounds rather than putting up with paying even more to your lender.

"There are lots of lenders out there who want your business and many will prove it by waiving some or all of the costs of switching."

Which? has calculated that customers on standard variable rates could save on average £475 a year by switching.

Banks swift to apply rise

There were some fast reactions on the savings front to this week's base rate rise. Within hours of the announcement banks were laying out their stalls.

The fact that, as one Barclays economist puts it, the rise was "no particular surprise," meant that some of the banks had their marketing spin polished, and announcements about carefully selected accounts ready to roll off the presses.

For Barclays it was the confirmation that it would be passing the full quarter of a percent rise on to Rewards and Tracker savings account customers from March 1.

For Rewards account customers who make no more than two withdrawals a year, the new rate will be 2.5%, but it drops significantly to 0.65% for account holders who make seven withdrawals or more.

Other Barclays savers will have to wait perhaps a week or so to learn their fate but instant access account holders probably won't be holding their breath.

There was no increase in November when the base rate last moved. The rate of interest on this account is currently 0.15% and it last changed in May last year when it went down from 0.25%.

Tesco was also among the early birds this time around. It has upped its instant access rates by a quarter of a percent to 2.85% for balances of £1-£2,999. For £3,000-£4,999 the rate will now be 3.05%.

Some of the biggest high street names including Lloyds TSB, Abbey, Halifax and Nationwide had yet to reveal plans for their savings accounts when Jobs & Money went to press.
Mary O'Hara