Banks charge more for new mortgages

Lenders fail to pass on cut in Bank of England interest rate

Hometrack said the average cost of a home has fallen by around 9 per cent during 2008 (Reuters)

Britain's mortgage lenders are continuing to raise their interest rates for new customers and neglecting to pass on the falls in market lending rates, which have been easing for several weeks.

The Bank of England slashed its main interest rate by a third to 3 per cent last week – the lowest in more than 50 years – and further cuts are expected, possibly as soon as next month, after new data revealed that inflation is falling faster than expected.

Yesterday, the Office for National Statistics said inflation, as measured by the consumer prices index, fell to an annual rate of 4.5 per cent in October, down from 5.2 per cent the month before. Economists had been expecting a smaller drop but a combination of falling petrol prices and a slowdown in the growth in food prices helped to bring the rate down faster than predicted.

Although homeowners with tracker mortgages are set to see large cuts in their monthly payments after this month's 1.5 percentage point cut in the Bank of England interest rate, consumers looking for new tracker deals are likely to be paying a bigger margin above the Bank rate than they would have done just a fortnight ago. Libor – the rate at which banks lend to each other, and the rate at which they borrow funds to lend to mortgage borrowers – has fallen, from about 5.7 per cent at the end of last month, to a little over 4 per cent yesterday.

However, in spite of a closing in the gap between Libor and the Bank rate, lenders are still increasing the margin on new mortgage products. Halifax released a new range of trackers at the weekend, which charge between 1.99 and 2.39 percentage points above the Bank rate. Last week, Lloyds, Abbey and Alliance & Leicester also released new trackers – all priced at least 1.79 percentage points above the Bank rate.

"The margins are very wide – much wider than they were a month ago," said David Hollingworth, of London & Country Mortgages, the independent broker. "But for many consumers, a bigger problem will be that most of the products available at the moment are only for those with a low loan to value [LTV]."

Almost all of the new trackers available are only open to borrowers with more than 25 per cent equity in their property. For homeowners who have a mortgage worth 80 per cent or more of their property's current value, it is now all but impossible to get a tracker deal. And for those with a 90 per cent LTV, there are only a handful of products on offer – mostly at punitive interest rates more than double the Bank rate.

Mr Hollingworth said a rising number of borrowers may be forced to revert to their bank's standard variable rate (SVR). This may not be as unappealing as it once was, as many banks have slashed their SVRs by 1.5 percentage points since the start of the month, after the Chancellor put pressure on them to pass on the full Bank rate cut.

Sue Anderson, of the Council of Mortgage Lenders, defended the banks' decision to increase the margin on their trackers. "It reflects the mix of business levels that lenders now have," she said. "A lot of lenders fully cut their SVRs by 1.5 percentage points, even though their own funding cost would not have been cut by that amount."