What's happening to mortgages?

You might think a low interest rate environment is good for borrowers, but this isn't necessarily the case.

Around one million mortgage borrowers will see their repayments rise from this month following increases in their lender's standard variable rate (SVR). There's also been bad news for those with interest only mortgages, and mortgage rates in general are on the up.

So what's going on? Here we take a look...

Standard variable rates

Halifax, Co-operative Bank (which owns Britannia) and Yorkshire and Clydesdale Banks all increased their (SVRs) on May 1. Royal Bank of Scotland also increased the SVR on its offset mortgage and the One Account. And next month Bank of Ireland will implement the first in a two-stage hike of its SVRs.

About 850,000 Halifax customers are affected by the SVR increase. Its rate has gone up by 0.49 percentage points from 3.50% to 3.99%. This will add £40 to the monthly payments of someone with a £150,000 25-year repayment mortgage, costing them an additional £480 a year.

Bank of Ireland borrowers will see an even bigger leap in their mortgage costs. Its SVR is rising in two stages: next month is goes up from 2.99% to 3.99% and in September it will rise again to 4.49% which will add an extra £1,470 a year to the mortgage costs of someone with a £150,000 loan.

Could more lenders hike their SVRs?

The important thing to note about SVRs is that they are not directly linked to the Bank of England base rate. This is why these lenders have been able to change their rate even though base rate has remained frozen at 0.50% for more than three years. Therefore we could see more banks and building societies increase their SVRs in the coming months.

There are two major lenders, Nationwide Building Society and Cheltenham & Gloucester, which are precluded from putting their SVRs up because their terms and conditions state that the SVR will never be more than two percentage points above base rate.

To get around the problem of such cheap lending, in 2009 Nationwide brought in a second rate (the Standard Mortgage Rate) at 3.99% for new customers which did not come with any price guarantee. The following year, C&G did the same with its Homeowner Variable Rate). Most lenders though are free to hike SVRs at will.

Certainly, if your mortgage is with one of the providers to have already increased its SVR, now could be the time to remortgage onto another deal. An independent mortgage broker will be able to explain the options if you're not confident about doing the research yourself.

But even if your lender hasn't upped its rate, it could be worth taking pre-emptive action and remortgaging now anyway. Those with Nationwide or C&G may decide to stay put for the time being, but for everyone else there is no guarantee that the SVR won't rise. And rates on new mortgage deals are also on the up so it could end up costing you more if you hold off for a few months.

Mortgage rates rise

After the mortgage drought caused by the Credit Crunch last year, there seemed to be a few green shoots in the mortgage market. The number of mortgages available to 90% of the property's value has increased, rates became more competitive and lenders appeared to be relaxing their criteria slightly. However, in recent months there are signs of contraction once again, and if you are looking for a mortgage at the moment time is of the essence.

Mortgage rates have been climbing over recent months. We've been tracking the rates here at MoneySupermarket and back in February, the average two-year fixed rate was 3.99%. It is now 4.21%, meaning someone taking a two-year fix now and borrowing £150,000 on a 25-year repayment basis, will pay £225 a year more than if they'd locked in to a two-year deal back in February.

The cost of fixing for five years has risen from an average of 4.61% to 4.75%. And it's not just fixed rates that are going up. The average three-year tracker rate has climbed from 3.43% to 3.88%, while the typical lifetime tracker rate is now 3.65% up from 3.43% in February.

No end in sight

Lenders blame higher wholesale costs and there is little to indicate that the backdrop will change in the near future. If anything it could get worse. The Eurozone crisis has impacted the cost of funds on the wholesale markets and with nervousness surrounding the future stability mounting again following the French and Greek elections, it could affect the willingness of European institutions to lend to each other. If there is less money in the system, the cost of borrowing will rise.

Therefore, it is well worth acting sooner rather than later if you are looking for a mortgage just in case the cost does get more expensive. And don't worry if your current mortgage deal doesn't end for a few months. Mortgage offers remain valid for up to six months - this varies between lenders so it is worth checking but it means you can apply ahead of time.

Also, a number of lenders have a backlog of applications at the moment so it could take longer than you are expecting for your mortgage to be approved - another reason not to leave it to the last minute.

Click here to compare the best mortgage rates.

Interest-only clampdown

It is getting increasingly difficult to get an interest-only mortgage. The Co-op and Britannia have just stopped offering interest-only loans altogether while other lenders including Santander and Royal Bank of Scotland/NatWest have tightened the criteria on which they will lend on an interest-only basis and require borrowers to have a deposit of at least 50%.

There is concern that some borrowers with interest-only loans - where the monthly payments cover only the interest and don't pay off any of the capital - have no repayment plan in place which could potentially mean they will be unable to repay their original loan at the end of their mortgage term. As a result the Financial Services Authority, the regulator, said as part of its Mortgage Market Review, that lenders will be responsible for ensuring that any borrower applying for an interest-only mortgage has an adequate repayment plan.

While The Co-op is the first bank to stop offering interest-only loans completely, it probably won't be the last now the onus of responsibility is firmly in the lender's hands: after all it is simpler not to offer a product than to carry out all the necessary checks in order to ensure that a borrower will have the means to pay off their mortgage.

This clampdown could cause problems for those with interest-only mortgages, many of whom will have a repayment plan, as their remortgage options are going to become fewer and further between. Some will either have to stick with their current lender and pay SVR or remortgage onto a repayment deal which will mean an increase in their monthly repayments.

The vast majority of people opt for repayment mortgages because they are risk free in terms of the fact you know your debt will be completely paid off. But, for some there are tangible benefits of opting for an interest-only loan. If you know your salary will increase significantly in the future, have other investments or are set to inherit a sizeable sum of money it can make sense to go for interest-only and take advantage of lower monthly repayments. Nevertheless the days of interest-only mortgages seem to be numbered.

Seek advice

Working out what the best mortgage option is can be difficult and confusing but it's important to get it right as the wrong decision could cost you thousands of pounds. If you aren't confident about making the decision yourself speak to an independent mortgage broker.

You can get free advice from our mortgage partner L&C Mortgages by calling 0844 776 5072.

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.