Britain's second biggest mortgage lender Santander hits homeowners with higher bills as it hikes key rate 0.5%, adding £500 to mortgage bill

Britain's second-biggest mortgage lender is raising its standard rate, affecting hundreds of thousands  of customers.

Spanish-owned Santander is to increase the rate from 4.24 per cent to 4.74 per cent in six weeks.

The rise comes despite a record low Bank of England base rate, which has remained at 0.5 per cent for three years.

More than 400,000 Santander customers paying the standard variable rate (SVR), which homeowners move to at the end of a fixed or tracker deal, will be affected by the change.

The cost of a typical £150,000 loan will rise by £500 per year.

The bank has also broken a pledge about future increases, raising its self-imposed SVR limit from 3.75 percentage points above the base rate to 4.99.

Even if the base rate stays at its current level, Santander could now raise its SVR to up to 5.49 per cent, adding hundreds more pounds to homeowners’ bills.

Santander bank

Santander bank

Halifax, Royal Bank of Scotland,  the Co-operative, the Bank of  Ireland and the Clydesdale and Yorkshire banks have all already raised mortgage rates for customers on standard rates this year. Marc Gander, founder of campaigning organisation the Consumer Action Group, said: ‘This is shameful.

‘The banks have received billions from the Government, yet none of them are giving ordinary people the chance to have a breather and replenish their finances – it is all about grabbing money.’

Santander’s higher rate will take effect from October 3. As well as  those already paying the standard rate, many more who are currently  on fixed and variable deals will be affected in future.

Una Farrell, of the Consumer Credit Counselling Service, said: ‘This is an extra cost which has come out of the blue which families will suddenly have to contend with. You cannot simply cut back on your mortgage.’

Santander, which has written to customers stating its intentions, blamed increased costs and red tape for the change.

A spokesman for the bank said: ‘We believe that all products we offer should reflect the cost to the bank of providing them, whether this is a monthly fee for a credit card or current account, or within the mortgage rate we charge.’

The bank is Britain's second biggest mortgage lender with 17 per cent of the market, according to Council of Mortgage Lender figures for 2011.

The bank has become the latest lender to hit homeowners in the pocket, lifting its SVR by 0.5 per cent. It follows a rush of similar hikes earlier this year, with fellow mortgage giant Halifax raising its SVR from 3.49 per cent to 3.99 per cent - soon after This is Money had warned of a rise.

Santander blamed, 'the increased cost of raising money which we lend to customers, including what it costs to provide you with your mortgage'.

The bank has also torn up its own rule book to implement the hike on some borrowers, by raising a cap on how high its SVR can go above the Bank of England's base rate.

The relatively small number of borrowers with this cap had presumed they were safe from their rate ever rising to more than 3.75 per cent above base rate, which with that currently at 0.5 per cent would have meant the SVR could currently go no higher than 4.25 per cent.

But Santander has raised that margin to 4.99 per cent, meaning the SVR could now rise to 5.49 per cent.

Unhelpfully, Santander borrowers hoping to remortgage and avoid the SVR rise will find that the bank does not publish rates for existing customers on its website - only for new customers remortgaging to it. Existing customers must instead phone the bank for 'bespoke' deals.

Santander said: ''This move is prompted by several factors - most notably the fact that for the last three years the amount it costs us to provide mortgages and the rates we offer our savings customers have been increasing despite the base rate remaining static.

'Indeed, for some time the correlation between base rate and mortgage and savings rates has been weakening. Additionally, the cost of running a bank in the UK has increased dramatically through a combination of increased liquidity, capital and funding requirements.'

'Our competitors have increased their SVRs by similar amounts earlier this year, reflecting the same market dynamics, and while we were able to delay this decision through the first half, conditions now require us to follow them and move to adjust our rate.'

Money market borrowing cost benchmarks have actually fallen in recent months, however, with the Libor rate dipping to 0.7 per cent from almost 1.05 per cent in March and five-year swap rates falling from 1.6 per cent to 1.18 per cent over the same period.

What is an SVR and why raise it?

A raft of lenders have raised their standard variable rates this year and more than 1m homeowners saw theirs go up from 1 May, which the Bank of England said affected 10 per cent of existing borrowers.

An SVR is the default rate that most mortgages switch to once an initial fix or tracker deal period ends, and unless there is a cast-iron clause preventing it, lenders are free to raise them at any time - independent of the Bank of England base rate.

Santander is one of the biggest high street banking groups, having taken over the former Abbey National, Alliance & Leicester, Bradford & Bingley and most recently the English branches of the Royal Bank of Scotland.

Its Alliance & Leicester borrowers are not affected as they already have a higher SVR of 4.99 per cent, borrowers with flexible and offset mortgages will also not see their interest rate rise as these deals are linked to base rate.

Santander has been hit with an increase in funding costs due to its credit rating being cut. Its Spanish parent group Banco Santander saw its rating downgraded to Baa2 from A3 by Moody's, while Santander UK was put down a notch to A2.

However, many had presumed Santander's SVR would be safe, as it had not been raised earlier this year and the Bank of England has launched a scheme to push at least £80bn of cheap funding into banks and building societies to boost mortgage lending.

Santander recently cut its mortgage rates and matched a record low five-year fixed rate mortgage rate at 2.99 per cent, alongside HSBC.

Earlier this year more than 1m borrowers saw their interest rates rise, as Halifax, Co-op, Bank of Ireland and Clydesdale / Yorkshire Bank all raised their SVRs.

However, at that time Santander appeared to rule out its own hike. In a statement it said: 'We have no plans to change either our Santander or Alliance & Leicester Standard Variable Rates in the immediate future.'

But This is Money warned that pledge was far from guaranteed. We said: 'Note the immediate future caveat - and [it] can be reviewed at any time.'

What can Santander borrowers do?

Best mortgage rates - what is on offer?

Borrowers with a 40 per cent deposit get the pick of the best rates, rates step up as deposits or equity get smaller.

Borrowers with a 40 per cent deposit can get a five-year fix at 2.99 per cent from Santander, with a £1,499 fee, if they are an existing current account customer.

HSBC has a five-year fix at 3.29 per cent with a £499 fee or 3.49 per cent fee-free, both for those with a 40 per cent deposit.

Nationwide has a four-year fix at 2.89 per cent, with a £99 fee, for those holding, or taking out its FlexAccount current account and a 30% deposit.

Post Office has a five-year fix fee free at 3.59 per cent for borrowers with a 25 per cent deposit.

YBS has a five-year tracker to fixed mortgage - starting as a tracker at 3.19 per cent (base rate plus 2.69 per cent) for two years then moving to a fix for three at 4.19 per cent, for those with a 25 per cent deposit paying £995.

HSBC has a lifetime tracker at 2.99 per cent for those with a 40 per cent deposit fee-free.

Santander borrowers seeing their rate rise to 4.74 per cent should at least seriously consider moving to a fee-free, early repayment charge free, life-time tracker.

This fee-free move could shave money off their monthly repayments - or leave them equal - and ensure their rate will only rise when base rate does.

Some could also grab a fix and pay less than they are now, or just slightly more, while many could get a tracker and pay less. This may incur a fee.

Borrowers on SVRs at other lenders should also consider remortgaging, unless they have a Nationwide / C&G-style guarantee capping it at a certain level above base rate.

Rises this year have highlighted the vulnerability of standard variable rates and discount rates linked to them.

At This is Money we favour five-year fixes and lifetime trackers over two or three year deals.

The first give a good rate and security over a medium-term period for those who want it, the second should allow borrowers to leave without incurring early repayment charges.

By contrast two or three year deals have slightly lower rates but will incur more remortgage fees and require borrowers to be looking around for a new mortgage just as rates may be starting to rise. Latest money market forecasts put the first rate rise in 2017, but these can changes substantially and base rate could go up sooner.

Five-year fixes are cheap money locked in for a decent term and very tempting, but make sure you read the small print and compare costs including fees to see what is best for you.

A lifetime tracker is a gamble on rates staying lower for longer and you saving money.

Currently the best five-year fixes can be had below 4 per cent and the best lifetime trackers at about 3 per cent.

That gap is the price of security and on a £150,000 25-year repayment mortgage it equates to £80 per month.