Why A Static Base Rate May Not Stop Large Mortgage Payment Rises

For millions of large mortgage borrowers in the UK, the static base rate has resulted in stable, low repayments. The Bank of England reduced the base rate to 0.5 per cent in March 2009 and it has remained at this level ever since. However, in the last few months it has become clear that a stable base rate does not necessarily mean that you can expect your large mortgage payment to stay the same. Now, another major UK lender has chosen to significantly increase interest rates for thousands of borrowers.

Bank of Ireland invokes ‘special conditions’ to hike tracker rates

A controversial decision by Bank of Ireland to raise the mortgage rate on thousands of loans has been criticised by mortgage experts. The Daily Telegraph reports that around 13,500 people with a Bank of Ireland or Bristol and West mortgage face steep increases to their monthly mortgage repayments from May 2013, as the lenders plan to double interest rates on some home loans.

While the base rate has been at its record low of 0.5 per cent since March 2009, the Bank of Ireland is planning to invoke ‘special conditions’ which allow it to increase the margin by which mortgages track this rate.

At present, many Bank of Ireland high value mortgage borrowers are on tracker deals with some customers paying just 1.75 per cent above the Bank Rate. However, from May 1 all residential mortgage customers will see the rate they pay rise to 2.49 per cent above that Bank Rate, with a further increase to 3.99 per cent over the base from October 1st.

On an ‘interest only’ million pound mortgage this would see monthly repayments rise from £1,875 now to £2,491 in May and then £3,741 in October. This would almost double the monthly payment in just five months. Buy-to-let mortgage customers face even steeper increases. From May 1st, all Bank of England tracker deals will move to 4.49 per cent over the base rate.

A Bank of Ireland spokeswoman said the changes reflected “the significant increase in the cost of funding these mortgages since 2008 and the need for banks to maintain greater levels of capital”.

The newspaper reports that ‘many are threatening to take their case to the Financial Ombudsman as they have a tracker mortgage, which is supposed to mirror the Bank of England Bank Rate.’

According to the Daily Telegraph, mortgage brokers have called this ‘an extraordinary move’. Islay Robinson, CEO of London mortgage broker Enness Private Clients said: “This is a staggering decision by Bank of Ireland. Tracker mortgages are designed to be transparent and to mirror changes in underlying interest rates. For a bank to come along and simply hike the mortgage repayments of thousands of high net worth borrowers is unprecedented. I will be extremely surprised if borrowers do not complain in their thousands.

“It is an even more bizarre decision considering that Bank of Ireland fund the mortgage deals available via the Post Office. Some of these deals are amongst the market leading products in the UK and so it seems that the Bank are giving with one hand to new customers and taking from existing borrowers with the other.”

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