Royal Bank of Scotland has hiked mortgage rates for 200,000 of its customers, it emerged today. It is the first major signal that banks are ready to trigger what experts have called a ‘mortgage timebomb. It comes just days after it emerged seven in 10 Britons are in debt and will raise fears that many will struggle to make monthly mortgage payments and even face repossession of their homes.
The hike will anger many struggling homeowners because the Bank of England base rate has remained unchanged at a record low of 0.5 per cent.
And banks will be accused of double standards as savers will almost certainly not see an increase in the interest paid back on their investments.
RBS, which is 82 per cent owned by British taxpayers, has already ordered the increase of 0.25 per cent to 4 per cent on its RBS and NatWest-branded offset mortgages.
The same change will impact on its ‘One Account’ range, which includes Virgin One, DirectLine One and NatWest One, from May 1.
But with banks facing increased costs, others are likely to follow suit with rate increases.
Earlier this month RBS revealed it was paying out a staggering £785million in bonuses to staff – including £390million for its investment bankers.
Meanwhile, the firm announced total losses of £2billion in 2011 – nearly doubling its losses of £1.1billion in 2010 after taking a near-£1billion hit for mis-sold payment protection insurance compensation.
Earlier this week it was reported that Britain’s biggest lender, Halifax, is expected to announce a sharp increase in its standard variable rate from 3.50 per cent to 3.99 per cent, affecting around one million customers.
A rise from 3.5 per cent to 3.99 per cent would add £735 a year to the cost of a Halifax £150,000 interest-only mortgage.
Halifax is part of the Lloyds Banking Group which is 41 per cent owned by the UK government.
Lloyds and RBS were rescued with taxpayer funds during the banking crisis of 2008-09.
Today’s news on the RBS mortgages comes just ahead of next week’s expected third anniversary of the Bank of England base rate remaining pinned down at 0.5 per cent. The Bank’s monetary policy committee will announce the March decision on rates on Thursday.
Banks constantly borrow money to fund their mortgage lending, even for existing borrowers who may have taken a standard variable rate years ago.
The costs are linked to inter-bank lending rates – markets where banks lend to each other.
The key rate is the three-month sterling LIBOR rate.
It soared at the peak of the credit crunch in 2008, rising 130 points above the then base rate of 5 per cent. The gap closed to nothing after the base rate was cut to 0.5 per cent in March 2009 but has since been on a near-constant incline with a particularly steep increase at the end of 2011.
Many experts feared the three-year high of 1.08 per cent for LIBOR at the start of the year signalled that a second full-blown credit crunch lay ahead.
But emergency measures by the European Central Bank has eased the pressure on banks and LIBOR has fallen back slightly to 1.06 per cent.
An RBS spokesman said the rate hike was due to the increased cost of borrowing on wholesale markets.
He said: ‘Over the last year the cost of funds at which we need to borrow at to fund our mortgage commitments has risen considerably.
‘We have absorbed the cost during this period but have now decided to pass on some of this increase, 0.25 per cent to our offset and One Account customers.
‘For the majority of our offset and One Account customers their new rate will be 4 per cent, the same as our standard variable rate.
‘We have written to all customers impacted to advise them of the changes. The bank has a range of alternative options for any customers who prefer to switch from their current product.’
The rate change will add further strain to hard-pressed households. On a £150,000 interest-only mortgage based on a term of 25 years at a rate of 3.75 per cent, the monthly repayments are £779.15.
With the 0.25 per cent hike, the monthly repayments would increase to £800.15 – a rise of £21 a month.
Chris Taylor, chief executive of insurer MarketGuard, offers a RateGuard policy that protects holders from rises. He said the news underlined how ‘how misguided people’s obsession with the Bank of England rate is’.
He said: ‘Banks borrow money at LIBOR which has risen 0.25 per cent since the autumn and will rise further if banks continue to believe there is risk in the market. Mortgage holders on SVRs must understand that they may not know what their mortgage payments next month will be.
‘Two rate rises in the space of a week are a blow to the already squeezed middle who will inevitably find their finances shrinking further. SVR mortgages are a timebomb waiting to happen.’
Borrowers initial signs of tackling debts in the aftermath of the 2008 crisis, using the excess cash from lower repayments to pay down mortgages.
But experts say this has largely abated with becoming too blase about the new era of ultra-low rates.
Banks came in for stinging criticism earlier this week when the true extent of rate hikes was revealed in Bank of England data.
The figures showed the average ‘agreed’ overdraft rate in January was 19.51 per cent, the highest level since the Bank’s records began nearly two decades ago and nearly 40 times higher than the 0.5 per cent base rate. It means an overdraft of £1,000 a year would cost £195.
The average credit card rate is currently 17.32 per cent, which has jumped from 15.73 per cent in March 2009, the crucial month when the base rate was cut to its current low level.
Millions of homeowners with a standard variable rate mortgage are typically paying 4.16 per cent – again, the highest rate since March 2009.
The data comes just days after the five largest banks – HSBC, Santander, Barclays, Lloyds and Royal Bank of Scotland – revealed their results for last year.
Overall, the ‘Big Five’ made total profits of £10.7billion from their high-street operations while RBS chief executive Stephen Hester gave up his £1million bonus but only have widespread public anger.