Shock as Skipton reneges on borrowers' terms

Skipton Building Society has torn up its contract with mortgage borrowers which promises that the Standard Variable Rate (SVR) they are charged will never exceed Bank Base Rate plus 3%.

Skipton invoked the ‘exceptional circumstances’ clause in its contract with customers, saying that in the current economic conditions it can no longer afford to honour the agreement.

The society’s SVR will increase to 4.95%.

More than 60,000 customers could see their mortgage costs increase by £2,000 a year. The increase would add £157 a month to the typical £130,000 interest-only mortgage, or £105 a month to the same size repayment-type arrangement.

Skipton claimed it had no choice but to take action because of the ‘distortion’ caused by fierce competition for retail deposits (savings and current accounts) from the banks, many of which have been propped up with Government money, and from the Government-owned National Savings and Investments.

They are paying relatively high interest rates to savers in order to get funding in through the door, now that they cannot raise finance via the securitization markets, which have been closed since the credit crunch hit.

Building Societies have been forced to increase the rates they pay savers too, in order to compete. They use this money to lend out to borrowers in the form of mortgages.

“This…has pushed the cost of funding up to an unprecedented level,” said Skipton chief executive David Cutter.

“We hope customers understand that this is a necessary step that is in the best interests of our membership and the society itself,” he added.

The news deals a blow to the mutual movement, which has already seen a number of building societies go to the wall since the credit crisis started.

Mutual societies pride themselves on treating their customers fairly, but many have struggled to run their businesses successfully in recent years.

Nationwide, by far the UK’s largest building society, promised that its existing borrowers would never pay more than 2% above Base Rate, meaning thousands are currently paying just 2.5%. However, last April it introduced a new SVR of 3.95% for new borrowers.

Lloyds Banking Group also guarantees an SVR ceiling to its borrowers through C&G, Halifax, Intelligent Finance and Lloyds TSB. It is thought to be unlikely to renege on its promises because, as a partly state-owned bank, the political fallout could be disastrous.