Nationwide has paved the way for an across-the-board increase in mortgage costs by announcing that a 0.25% interest rate rise would be passed on in full to its 600,000-plus variable-rate home loan customers.
The building society said that if, as is widely expected, the Bank of England lifts the base rate by 0.25% to 0.5% on Thursday, it would increase both of its variable rates by 0.25%.
That would add £22 a month to the monthly mortgage bill for someone with a £175,000 mortgage, or £51 a month for a customer with a £400,000 home loan, assuming they are on Nationwide’s “base mortgage rate” and have a 25-year term.
There are as many as 5 million people on variable-rate mortgages in the UK. Responding to the announcement, Peter Gettins, product manager at mortgage broker London & Country, said: “The prospect of variable rates increasing from here is now looking more and more likely.”
However, some mortgage customers may end up escaping a rate rise. Several mortgage experts said it was possible some lenders may decide to absorb some or all of any base rate rise rather than pass it on to their variable-rate customers, in order to encourage these people to stay.
Nationwide’s decision to outline in advance its response to any decision by the Bank of England is likely to add to the sense of inevitability that many people feel about Thursday’s monetary policy committee meeting. An upwards move would draw to a close the longest period in living memory without an interest rate rise, with the last in July 2007, when rates increased to 5.75%.
Gettins said: “Anyone who is sat on a variable rate really ought to have a look around and see what else is available.”
Ray Boulger, senior mortgage technical manager at broker firm John Charcol, said the majority of lenders cut their variable mortgage rates by 0.25% following the August 2016 quarter-point base rate reduction. “I would expect most lenders to put their standard variable rates up by a quarter-point this time [assuming there is a 0.25% increase this week],” he added.
Across the country, more than half of all homeowners are on fixed-rate mortgage deals. Around 40% to 45% would be immediately affected by a rate rise.
Brian Murphy, head of lending at the broker Mortgage Advice Bureau, said: “The announcement by Nationwide today, who are one of the UK’s biggest mortgage lenders, isn’t a surprise and is highly likely to be the route that other banks and building societies will follow when it comes to repricing their products in the event that a rate rise does occur.”
Some banks and building societies that have standard variable rates significantly higher than average may absorb the rate increase themselves, rather than pass on the additional cost to customers, said Murphy. That is because an increase in monthly payments will prompt some customers to quit in search of a more competitive deal elsewhere.
Boulger said Santander would be “an interesting one to watch” because, at 4.49%, its standard variable rate was higher than that of many of its peers. Meanwhile, some of the smaller building societies have standard rates above 5% and may not feel the need to increase these in the event of an upwards move this week, he added.
Nationwide said it had decided to provide advance notice of its intentions in order to “give clarity” to its members. It said both its variable rates would remain competitive at 2.5% and 3.99%, assuming a 0.25% rise. It has also taken the opportunity to cut some of its new fixed rates by up to 0.5% - putting it at odds with many rivals which have hiked the cost of their fixed-rate home loans in recent weeks.
The society added that if the base rate were to rise to 0.5% on Thursday, it would pass on the full benefit of this increase to the majority of its savers.