Bank of IrelandAP Photo/Peter Morrison

Thousands of mortgage holders are about to see the interest rate on their borrowing increase massively - despite the fact that we have just seen the 4th anniversary of the Bank of England base rate falling to 0.5%.

So how can this be right? And will other firms follow suit?


Rates hike

The mortgages in question are those from the Bank of Ireland and Bristol and West. Residential customers on a tracker rate are currently paying 2.25%. They will see that rise to 2.99% in May and to 4.49% in October. Buy-to-let customers, meanwhile, will see their rate double.

It is thought that 13,500 customers will be affected by the move.

The banks have written to customers, explaining that they are being required to hold more cash in their reserves, plus the cost of funding mortgages has increased. They point out that the small print on their tracker mortgages includes a clause that allows for hikes under circumstances like these.

Time to move?

The banks also said that anyone who chooses to remortgage to escape the new costs will not have to pay early repayment charges. There are several options out there which are far more competitive. Norwich and Peterborough Building Society, for example, has just launched a two year fix at 2.24%, while Yorkshire Building Society has one for 2.64%.

However, this will be no help at all to those who find themselves back out in the mortgage market in difficult circumstances - this could include those with little equity in their property, or whose employment situations have changed since they took the mortgage out. They may find themselves unable to get another deal, so they have no choice other than to find hundreds of pounds more every month for their mortgage repayments.

For buy-to-let borrowers, who have based their rental charges on the cost of their repayments, this could tip them over into losing money, and force them to sell up.



Wider market

This is not the first lender to take this approach. Last year the Manchester Building Society raised tracker rates for those who had taken a mortgage out before 2004. For some people it meant the rate soared from less than 1% to 4.74%.

However, the good news is that the general trend appears to be going in the opposite direction. The government's Funding for Lending scheme has gradually been pushing prices down. The interest rates on both fixed and tracker mortgages has been falling slowly - although the best deals remain for those with large deposits

For those with smaller deposits things are looking up too, as the number of mortgages available is rising, the rates are falling, and banks are easing up slightly on the strict rules they apply before considering someone for a new mortgage.

It seems, therefore, that these banks are the exception to the rule so far. The message for borrowers is that if they are in a position to look elsewhere, they could end up with a better deal.

The only note of caution is that fees are on the up too - so make sure you factor them in when you're calculating whether it's worth shifting to a better deal or taking the pain being doled out by the Bank of Ireland and Bristol and West.



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