Tracker mortgages are supposed to be remain tied to the Bank of England base rate by an ‘unmovable’ margin for an agreed amount of time – say, two or five years.
Moving the goalposts
But, back in February, Bank of Ireland and Bristol & West – which are part of the same group – announced they were invoking a clause in some of their tracker mortgage contracts, which stated they could change this margin in special circumstances. The clause was present in 13,500 contracts taken out between January 2001 and December 2004.
The banks claimed that a regulatory requirement to hold greater capital reserves, coupled with the higher cost of funding mortgages over the past few years, met the criteria of these special circumstances – and they were therefore hiking up the tracker differential borrowers had signed up to.
The first round of price rises took place on May 1 when the 1.75% margin above the Bank of England base rate of 0.5% (resulting in a pay rate of 2.25%) was put up to 2.49% (resulting in a pay rate of 2.99%).
But from October 1, the tracker differential will rise again to base rate plus 3.99% (making a pay rate of 4.49%). For buy to let mortgage customers, the hikes are even steeper.
The base rate has stayed put at 0.5% since March 2009.
The impact in pounds and pence
So how does this translate into mortgage costs? A borrower with one of the banks who has a £250,000 repayment mortgage (taken over 25 years) would have paid £1,095 a month for their tracker deal at the start of this year. After May 1, this amount would have risen to £1,184 a month – and from October 1 they will pay £1,388 a month for the same loan – a monthly payment difference of nearly £300.
Even on smaller £100,000 mortgage (on the same terms), the hikes are significant. Borrowers would have paid £438 a month at the start of the year. From May 1, this would have increased to £474 a month – and, from October 1, these customers will be paying £555 a month for the same loan – a monthly payment difference of nearly £120.
In September last year, the banks also raised their standard variable rate (SVR – the automatic ‘go-to’ rate you pay at the end of a deal) from 2.29% to 4.49%, which affected around 100,000 customers.
Time to act!
There is some good news, though. Affected Bank of Ireland and Bristol & West customers won’t have to pay early redemption charges (ERCs) if they choose to remortgage to another lender. And if you are on the banks’ SVR, you would be free to leave without penalty anyway.
The other good news is that mortgage rates generally have been steadily falling over the course of 2013 so, especially if you have a significant chunk of equity to put down as a deposit, you can find rock-bottom mortgage rates. The best two-year fixed rate deals, for example, are now priced at less than 1.5%.
In other words, Bristol & West and Bank of Ireland customers have nothing to lose and everything to gain by upping sticks and finding a better, cheaper deal.
You can read more about today’s best remortgage deals in Rachel Wait’s article, Coming to the end of your mortgage? Where to go next?
And if you need further help, contact our partner mortgage broker, London & Country on 0844 209 8725 for fee-free independent advice.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct