Tens of thousands of borrowers face a shock jump in mortgage payments after Skipton Building Society, Britain’s fifth-largest building society, confirmed plans to raise its standard variable rate from 3.5 per cent to 4.95 per cent.

The move, to take effect from March 1, will raise mortgage repayments by up to 40 per cent for some borrowers, adding almost £200 a month to repayments on a £150,000 interest-only loan.

Skipton, with 100,000 borrowers, previously had guaranteed that its variable rate would not rise while Bank of England base rate stayed at 0.5 per cent, but it has cited a clause in its loans’ small print allowing it to ignore the promise in “exceptional circumstances”.

Skipton has blamed its decision on “unprecedented” competition in the savings market from National Savings & Investments (NS&I), the Treasury-backed savings provider, and state- controlled banks. Building societies have come to rely on funding from retail deposits for new mortgage lending as wholesale money markets stay frozen, but competition to attract savers has forced up the interest rates on offer, shrinking profit margins.

David Cutton, Skipton’s chief executive, said: “We are witnessing an extremely high cost of retail funding relative to the base rate, which has impacted our interest-rate margin over the last year. There is only a finite savings pot and building societies have faced tough competition over the last year from NS&I and banks, who continue to reduce their use of wholesale markets to fund new lending. This has driven up the cost of retail funding to an unprecedented level relative to mortgage rates.” Last year NS&I frequently appeared at the top of the best-buy tables for savings accounts. At present it is promising a 2.5 per cent return on its Direct cash Isa, compared with a promise of 2.25 per cent from Skipton on its online Isa account.

Experts say that other building societies are likely to follow suit and raise interest rates for homeowners on an SVR, the “revert” rate that borrowers switch to when a mortgage deal ends. David Hollingworth, of London & Country Mortgages, said the move was a “body blow” for Skipton borrowers.

For the full story visit  www.timesonline.co.uk

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