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Skipton Building Society is facing a legal challenge and growing anger over its decision to hike its standard mortgage rate by a whopping 1.45 percentage points next month.

A law firm is preparing a set of test cases in an attempt to reverse the controversial decision (see the Skipton rate shock MSE News story).

The move highlights the fury felt by thousands of borrowers who could see annual costs soar by almost 1,500 on a typical home loan.

Political pressure is also growing on the beleaguered lender with the Liberal Democrats calling for those affected to lobby the Financial Services Authority (FSA), the regulator, to intervene.

Broken promise

Anger centres not only on the size of the hike but the fact the lender has ripped up a guarantee the rate would stay within three percentage points of the Bank of England Base Rate other than in "exceptional circumstances".

Skipton announced last month its standard variable rate (SVR), the rate most fixed or tracker deals revert to, would rocket from 3.5% to 4.95% on 1 March. Base Rate is currently at 0.5% and has not moved for almost a year.

On a typical 150,000 repayment mortgage, this would see annual costs rocketing from 9,010 to 10,480.

Legal action

Leon Kaye Solicitors, which is bringing the action says, subject to opinion from senior legal experts, it plans to launch a test case "within months".

It says it has already been contacted by "dozens" of disgruntled borrowers, adding that numbers are not higher due to the relative infancy of its campaign.

Industry sources have questioned the law firm's chances of success but senior partner Leon Kaye says: "I would not have got involved if I didn't think we had a strong case.

"Skipton's move represents an unfair contract term as there was no definition of what constitutes exceptional circumstances."

One MoneySaver, who posts on our forum under the name JPS29, says: "In my opinion this is on a par with the bank charges scandal and could be the start of a massive campaign to reclaim our contractual rights.

"Imagine if I told Skipton due to my 'unforeseen and exceptional' circumstances I would like to change the terms of my mortgage. I would not be entertained and would probably be evicted."

Political pressure

The Lib Dems have condemned Skipton's rate hike and suggest borrowers ask the FSA to intervene.

Lib Dem Treasury spokesman Lord Oakeshott says: "Skipton mortgage holders who signed up in good faith have every right to feel cheated by what has happened.

"I would advise mortgage holders who have lost out through this move to write to the FSA in the first instance and get their view on whether Skipton has acted properly."

The FSA says it cannot comment publicly on individual firms.

What can borrowers do?

Most mortgage holders on Skipton's SVR can switch lender if they find a better deal as they are not locked in (see the Cheap Mortgage Finding guide).

However, the credit crunch has made banks and building societies more selective in who they lend to, meaning only those with a good credit history or large amount of equity in their property will be accepted by a new lender.

Some borrowers on deals linked to the SVR would normally pay a four-figure fee to move but Skipton is waiving charges until 1 May.

Martin Lewis, MoneySavingExpert.com founder, says: "This sort of irresponsible rate rise destroys any faith the public has in the mortgage system. What's worse, is that it comes from a mutual, not a bank.

"I suspect there is little regulatory or legal recourse yet Skipton's members should put pressure on the board. Do they want people making these decisions to run their building society?"

What Skipton says

When announcing the rate hike last month Skipton said it could only maintain competitive savings rates by hiking its SVR.

A Skipton spokeswoman adds today: "As a responsible business we are in constant dialogue with our regulator. We are not aware of any formal challenge being made but if one was to arise we would deal with it through our normal procedures."

Skipton is one of a number of building societies to have hiked its rate over recent months but the level of its rise is by far the largest.

Further reading/Key links

Mortgage cost-cutting guides: The Remortgage Guide, Mortgage Haggling, Cheap Mortgage Finding, Ditch My Fix?