Lloyds lifts standard variable rate as mortgage pledge dents profits

Published 28th May 2010

Lloyds TSB introduces higher variable mortgage rate for new borrowers


Lloyds TSB has become the second big lender to buckle under the pressure of guaranteeing that its standard variable rate will not rise more than 2% above the Bank of England's base rate: the bank is to introduce a second, more expensive rate for new borrowers from 1 June.

Lloyds will impose a "homeowner variable rate", now at 3.99%, on all new mortgage customers as their fixed or tracker deal ends. As the shortest mortgage deal it offers lasts for two years, borrowers will start paying the new rate in June 2012.

The new rate will not apply to existing borrowers, who will continue to benefit from the guarantee, which was first made at the beginning of the decade. This means they will either remain on the standard variable rate (SVR) of 2.5%, or revert to it when their mortgage deal ends.

Nor will the rate apply to Halifax and Bank of Scotland mortgage customers, who have their own SVRs: 3.5% for Halifax, and 4.84% for BoS customers, who have predominantly borrowed higher risk buy-to-let and self-certified loans.

Emma Partridge, a Lloyds spokeswoman, refused to specify how many borrowers were on the lower SVR but said the move was a response to market conditions of prolonged low base rates and high wholesale borrowing costs. She said that by raising the "go rate" that borrowers would eventually pay, the bank could offer more attractive initial deals. "We have to price them for the duration of the mortgage. By making the back end a little bit higher, we can reduce the costs at the beginning," she said.

Michelle Slade, of Moneyfacts.co.uk, said: "When Lloyds TSB made the decision to guarantee its SVR it never expected bank base rate to go so low. The lender has seen its balance sheet dented by borrowers reverting to a record low rate of 2.5%. Many of its borrowers are opting to stay put and overpay their mortgage rather than remortgage to a new deal at a higher rate."

The news comes two days after Nationwide building society admitted that its same guarantee that its SVR would not rise more than 2% above the base rate had cost it £450m in annual profits. The society introduced a higher SVR for new customers a year ago to combat the problem, but the first borrowers will only move on to the new rate of 3.99% in six months.

The society implemented its guarantee as part of the "CAT standards" initiative, a voluntary government scheme introduced in 2000 to prevent confusing marketing and hidden charges.

Chief executive, Graham Beale, acknowledged on Tuesday that the 2.5% rate was very attractive, and that borrowers were reluctant to remortgage to other deals: the society still has 530,000 Nationwide borrowers paying the lower SVR, with more going on to this lower rate because they took out mortgage deals before the new higher rate was introduced.

The cost of maintaining the 2.5% rate has forced the society to slash interest rates on many savings accounts, resulting in an exodus of savers, who have withdrawn net deposits of £8.2bn, and Beale warned that it might have to cut branches and jobs after the near halving of its annual profits.

Ray Boulger of mortgage advisers John Charcol said: "Lloyds TSB, C&G and Nationwide borrowers who wish to remain on a variable rate, which for the time being seems sensible for most people, would be mad to opt out of a lifetime tracker capped at 2% above bank rate with no early repayment changes.

"I can completely understand the commercial pressures that have pushed Lloyds Banking Group down this road but it does remove one of Lloyds TSB's unique selling points and means that new customers will get a less good deal, particularly those on a relatively high loan-to-value taking a two-year deal."

Source: ' Guardian '

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