Standard Life forced to raise mortgage rate

Standard Life Bank has increased mortgage rates for 70,000 customers in an attempt to claw back revenues as it enters its fifth year of losses.

The bank said it had to raise standard variable rates (SVR) because of an increase in the cost of funding mortgages from the capital markets in the past year. Instead of lowering rates on savings accounts, as many of its rivals have done in the past few weeks, Standard decided to pass on the increase by hiking rates for its borrowers. Its SVR rates will rise from 5 per cent to 5.1 per cent, an increase of £6.72 per month on an average £80,000 mortgage.

Borrowers were surprised by the move to increase rates as the Bank of England has kept interest rates at a 39-year low of 4 per cent for more than a year. Other large mortgage banks are not expected to follow suit.

The ratings agency Moody's recently downgraded the Standard Life group two grades from AAA to AA2. This will have affected its credit quality, and is likely to have been a factor in making its wholesale mortgage funding more expensive.

The bank is wholly owned by Standard Life, the Edinburgh-based mutual insurer, and was launched at considerable cost to the company. It has invested £370m in the bank since its launch in 1998, and the bank has made accumulated losses of between £120m and £130m.

John Gill, finance director of the bank, yesterday said the bank would post a loss in the single figure millions for 2002, and would be profitable by next year. Standard had hoped to make its bank profitable by 2000. "The bank is well on schedule to be profitable by 2004," Mr Gill said. When we launched the bank we did not anticipate it would grow so quickly. We have a mortgage book of £7.5bn."

The parent group has lost billions of its surplus capital in three years of stock market falls. It saw at least £5bn of its spare capital disappear in 2001 and was recently forced to slash bonuses to policyholders in order to maintain its reserves. One of the bank's mortgages, the Future Perfect mortgage, is securitised directly into Standard's with-profits fund. The bank has written £650m of this mortgage using the with-profits fund in the past three years.

"The bank was supposed to be profitable for the life insurer quickly," said Ned Cazalet, an independent insurance analyst. "The life fund, which owns the bank and incurs its losses, has been hammered financially in the past three years and this need to raise interest rates may well be to squeeze some extra margins out of it."