Abbey habits to cost home owners more

Millions of homeowners face a hike in the cost of their loans as Abbey National, the UK's second-largest lender, today announced an increase of 0.25 per cent in its mortgage rate.

The increase will add about pounds 7 a month to the typical cost of a pounds 50,000 mortgage. Other lenders, including the Halifax and the Woolwich, may follow suit within days.

Yesterday, Abbey National said its move was caused by the need to deliver better rates to its 12 million savers, who outnumber its borrowers by seven to one.

Charles Toner, deputy chief executive, denied it could dampen demand in a still-fragile housing market.

"The changes to mortgage rates will have little impact on demand, given that we are now seeing real improvements in the market. The increase will mean only pounds 1.65 a week to the average repayment borrower. We expect to continue to offer a wide range of fixed-rate mortgages for the increasing number of customers seeking security in the run-up to the [general] election."

New Abbey National borrowers will pay the higher rate immediately, while existing ones will see their mortgages rise from 18 December. Its tiered rates mean borrowers with loans of up to pounds 60,000 pay 7.29 per cent, dropping to 7.19 per cent for loans above pounds 100,000.

The company's move seems set to bring to an end a 12-month period in which mortgage interest rates have been at their lowest in 30 years. It follows attempts by the Chancellor, Kenneth Clarke, to convince the City last week that despite his 1p cut in the basic tax rate, his Budget remained fiscally responsible.

However, some economists believe the latest house-price increases are one of several factors likely to help fuel a spending boom, potentially leading to higher inflation.

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