Bernard Ginns: Skipton's rate rise an inevitable taste of things to come

SKIPTON Building Society's decision to hike up its standard variable rate came in for quite a kicking in the national press.

The building society is raising its SVR from 3.5 per cent to 4.95 per cent from March 1, which will lead to hefty increases in monthly mortgage repayments for tens of thousands of customers.

One commentator described Skipton's move as a "desperate act" that is against everything the mutual movement stands for.

Hide Ad
Hide Ad

There was anger at the building society being allowed to make up the terms of its contract "on the hoof". Skipton justified the tearing up of its rate ceiling guarantee citing "exceptional market conditions", which led to calls for the scrapping of small print to save customers from nasty surprises.

In language reminiscent of the vitriol directed at bankers, there was also a dig at the "few grossly overpaid individuals" who run the 157-year-old building society.

According to the 2008 accounts, chief executive David Cutter took home 320,000 in salary and benefits, while John Goodfellow, the former CEO, received 463,000 in salary and benefits.

Handsome salaries for sure – and well over and above the income of those most likely to be hit hardest by the SVR hike – but these are a distraction.

Hide Ad
Hide Ad

Building societies have had a tough time over the last couple of years and these tough times are likely to continue as long as interest rates remain so low.

The seizing up of the wholesale money markets has forced big banks into the market for retail deposits – the finite amount of money that mutuals rely on to fund their lending.

To remain competitive, building societies must make sure their products are attractive, thus squeezing their margins.

They have also faced competition from taxpayer-supported banks, which attracted retail deposits through the worst of the financial crisis with their implicit guarantees.

Hide Ad
Hide Ad

In addition, mutuals have been forced to pay a disproportionate amount under the Financial Services Compensation Scheme to bail out the victims of failed banks.

Mr Cutter defended Skipton's move, saying it was in the best long-term interests of the society as a whole. He is taking a calculated gamble that most borrowers won't jump ship to other lenders.

Research out yesterday from website Moneyfacts.co.uk shows that they may be unlikely to do so: 23 out of 84 mortgage lenders now have an SVR of 5 per cent or higher.

Moneyfacts also states that the average SVR among the top 10 building societies is 5.12 per cent. What is certain is that the historically low interest rate is having a malign effect on the mutual sector, which is likely to undergo more consolidation this year.

Hide Ad
Hide Ad

Sooner or later the Bank of England must bite the bullet and raise interest rates. After years of indebtedness, people must be encouraged to start saving again.

Despite the inevitable pain for borrowers that will follow – and Skipton's move is surely a precursor of things to come – we have to return to normality at some point. The question for the Bank's monetary policy committee is when...

THE public debt is a subject I return to frequently in these columns, as it is one of the biggest challenges facing the country at the moment. During a conversation last week, I encountered a refreshing perspective on the conundrum of how to rebalance the nation's books.

It starts with a quote from Maurice Chevalier, the late French vaudeville entertainer, who famously said: "Old age is not so bad when you consider the alternatives."

Hide Ad
Hide Ad

Over to Giuseppe Fontana, professor of monetary economics at Leeds University Business School. "From this perspective I would say that the current and prospective budget deficits should be seen as 'not so bad' when the alternatives are considered.

"Those alternatives would be attempts to balance the budget with increases in tax rates and cuts in public expenditure, resulting in lower output and higher level of unemployment now and in the future. I will personally be concerned if the debt-to-GDP ratio in UK will be on an upward explosive path. But this is not the case. The most likely scenario for this country is an increase in the debt-to-GDP ratio for a few years, mostly due to a decrease in tax income because of the lower level of economic activity.

"This increase in the debt-to-GDP ratio is likely to be followed by a period of stabilisation. And once the economy is again on its feet the debt-to-GDP ratio in UK should decline.

"In short, the scale of the budget deficits should be seen as a measure of the extent of the recession and its effects: any regrets over the size of the budget deficit should be regrets over the scale of the recession, which has made the government deficit necessary."