'Strong case' for mortgage holders in Skipton rates row

A LAW firm which is mounting a legal case against Skipton Building Society's decision to increase mortgage rates for 64,000 borrowers is planning to contact the mutual to start proceedings.

Leon Kaye, senior partner at Leon Kaye Solicitors who are acting on behalf of more than 100 angry mortgage holders, said they will write to Skipton "sooner rather than later" after receiving counsel's opinion on Tuesday that they have a strong case.

It comes after the society revealed plans to raise its standard variable rate from 3.5 to 4.95 per cent last month despite a guarantee they would never have to pay more than three per cent above the base rate.

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Skipton has said it reserved the right to remove the ceiling in "exceptional circumstances", but Mr Kaye will argue that the society breached the Consumer Contracts Regulations 1999.

"We have obtained counsel's opinion on this and they advised we have got a strong case so we are hoping to move forward very quickly," he said. "We are just working out our options."

Group chief executive David Cutter said he sympathised with borrowers but hoped they would understand why the group made the decision.

He added that the society would deal with any complaints "in line with normal procedure".

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The UK's fourth largest building society yesterday posted group pre-tax profits up 41m to 63.5m – up 100,000 to 18m on an underlying basis – in the face of intense pressure from historically low interest rates and competition for savers.

Last month, it also announced 90 redundancies at its Skipton head office and Scarborough office under plans to boost the group's resilience.

Mr Cutter said the steps were necessary after it suffered a "material reduction" in its net interest margin, which slumped by 33m to 53m after the base rate was slashed to an all-time low of 0.5 per cent.

He said: "We have taken prudent action to widen the margin in the long-term best interests of the society. In addition, uncertainties remain regarding the economy; the Government's finances; the impact of an historic quantitative easing programme; and the distortions in the UK savings market – we therefore remain vigilant.

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"That is why we announced steps, after the end of the financial year, which will enable the society to combat the challenges it faces."

Skipton, which also announ-ced the takeover of Chesham Building Society, said 2009 profits were boosted by a 40m one-off gain from its sale of the Callcredit credit reference agency in December.

Its estate agency arm Connells also saw profits leap from 10.4m to 54.1m.

However, the mutual said the core savings and lending business was loss-making as it struggled to maintain savings rates while the base rate remained so low.

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Building societies have been hammered during the financial crisis, hit by stiff competition as banks left unable to rely on wholesale markets for funding have instead turned to savers' deposits.

They have also faced rivalry from state-owned players, with Northern Rock's 100 per cent deposit guarantee and the implicit safety of part-nationalised Lloyds Banking Group and Royal Bank of Scotland said to give them an unfair advantage.

Skipton bought smaller rival Scarborough Building Society last March, which helped it grow assets and savings deposits. The group also boosted its core tier one capital – a key sign of financial strength – to 9.4 per cent from nine per cent.

Its savings balance rose 29 per cent to 2.3bn, while group mortgage assets increased 1.3bn to 10.7bn.

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Between 2008 and 2009 Skipton's borrower numbers increased from around 124,000 to 131,000, partly as a result of 15,000 additional mortgage holders joining the society following the Scarborough merger.

About 29,000 borrowers are currently on the standard variable rate. A further 35,000 have products which revert to the standard variable rate at some point in the future.

A spokeswoman said the society had not seen a trend of borrowers leaving since the standard variable rate announcement.

Factors that hurt oldest building society

The UK's oldest building society, the Chesham, said it was forced to merge with Skipton Building Society after low interest rates left it unable to make a profit.

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The Chesham, which has three branches, 33 staff and 200m of assets, said the fact that the Bank rate had remained at 0.5 per cent since last March had made it unable to make a profit on its lending and borrowing.

In an information sheet to its members, Chesham Society said: "Since the onset of the 'credit crunch', Chesham has experienced a period of unprecedented pressure on its financial performance caused by a number of factors."

The Chesham has just three branches and fewer than 16,000 savers.

Paul Kilbride, chief executive of Chesham, said: "The Chesham board firmly believes that the clear benefits of being part of a larger building society with broader funding sources and a larger capital base... are in the best interests of its members."

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