Lloyds TSB increases variable rate due to tough market

by Mark Johnston

The Lloyds TSB banking group is feeling the burden of its guarantee to keep its standard variable rate at no more than 2% above the Bank of England base rate. Prolonged record lows in the Bank of England base rate and increasingly higher costs of wholesale borrowing have led Lloyds to rethink its promise.

As of the 1st of June 2010, Lloyds introduced a new variable rate for new borrowers calling it the “homeowner variable rate”. The new rate of 3.99% will only apply to new borrowers whilst Lloyds will continue to guarantee its promise to existing customers of the current 2.5% variable rate.

The decision seems to have come as a result of the sustained low base rate which may have damaged the banking group’s balance sheets. Emma Partridge of Lloyds said that by raising the “go rate” that borrowers would eventually pay, the bank could offer more attractive initial deals. “We have to price them for the duration of the mortgage. By making the back end a little bit higher, we can reduce the costs at the beginning,” she said. Reading between the lines mortgagerates.org.uk are hoping this means we should see some attractive mortgage offers coming out as a result.

Lloyds 2 year fixed rate mortgage is currently 3.79%, which reverts to the Lloyds new homeowner variable rate of 3.99% after two years. This works out at 4.2% APR for comparison as it has a £895 fee attached. They do offer a fee free version at 4.39%, again reverting back to their homeowner variable rate of 3.99%; this seems to work out a little better in terms of value as the APR is just 3.6%. Both these products must start by the 30th September 2010 for customers borrowing between £5,000 and £1,000,000 for up to 60% of their homes value.

Customers looking to purchase a £100,000 home would only be able to borrow £60,ooo. £60,000 would cost borrowers £309.79 at the 3.79% fixed rate for a 25 year mortgage. After two years the rate would change to the new ‘homeowner variable rate’ of 3.99%. This change would currently cost £316.37 for a £60,000 mortgage whilst existing mortgage customers would have paid less if they were on the historic variable  rate of 2.5%.

The 2.5% variable mortgage rate only applies to customers who already have a Lloyd’s mortgage which were applied for before 1st June 2010. It’s guaranteed to be no more than 2% of the Bank of England base rate. If you are one of these customers, Lloyds do allow you to move onto a different variable interest rate but be careful as you could potentially be worse off. If you do decide to move from the variable rate to something else you cannot move back.

Although this increased rate may mean that new borrowers feel the pinch a little, we’re hoping that this may give Lloyds a little more flexibility to bring some of their front end rates down. Whatever happens, make sure you visit mortgagerates.or.uk to get up to date news of the UK mortgage market.

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