Abbey to start round of home loan rises

Abbey National will today raise the cost of home loans by 0.25 per cent for its 1.6 million borrowers, sparking a generalised increase in mortgage interest rates by UK lenders.

The increase, which will push up the cost of a typical pounds 50,000 mortgage by about pounds 7 a month, is expected to be followed within days by most other lenders, including Halifax and Woolwich.

The Abbey said yesterday its decision was mainly prompted by the need to offer its 12 million savers a better deal.

New borrowers will pay the higher rate immediately, while existing ones will see their mortgages rise from 18 December. Rates for savers will rise by an average of 0.25 per cent on 1 January.

Charles Toner, deputy chief executive at Abbey National, said: "We wanted to increase rates, particularly for our savers, who outnumber borrowers by about seven to one and have lived in a low-interest-rate environment for some time."

The company's move seems set to bring to an end a 12-month period in which mortgage interest rates reached lows last seen in 1966. Abbey National pointed out that even after the rise, mortgage rates would be at their lowest for 25 years.

It follows attempts by Kenneth Clarke, the Chancellor, 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.

Halifax is poised to announce today that house prices rose a further 0.5 per cent in November, giving an overall 7.1 per cent rise in the past 12 months.

A separate report by Bob Pannell, chief economist at the Council of Mortgage Lenders', said today that an increase in the number of owner-occupiers moving home, linked to first-time buyers coming on to the market, meant the present recovery was likely to be durable.

Until last week, lenders had said they would wait for the outcome of the regular monthly meeting between Mr Clarke and Eddie George, Governor of the Bank of England, on 10 December, before making a decision on mortgage interest rates.

One building society executive, who refused to be named, said yesterday: "Some of us felt that, having recently weathered a rise in base rates to 6 per cent without putting up our variable rates, a increase in mortgage rates was very likely unless Mr Clarke really pulled something out of the bag in his Budget speech last week.

"I'm not sure he really achieved that. Even so, we were planning to go some time after the regular meeting with the Bank of England. This has caught us on the hop and we will probably respond quite quickly."

Pressure on lenders to raise rates has also come from Nationwide, which recently pushed up the cost of home loans to 6.74 per cent for its 1 million borrowers. The society's move, due to take effect today, still leaves it at least 0.25 per cent cheaper than its main competitors.

But at the same time, Nationwide also announced that it was increasing savings rates by a similar amount, making it vastly more competitive on the investment front.

Halifax has some 2.5 million mortgage accounts, compared with 17 million savings accounts. The society's demutualisation, which is set for next summer, could leave it vulnerable to customer-poaching from competitors once its savers receive a free shares handout and are no longer locked in to their accounts.

David Gilchrist, group secretary at Halifax, said yesterday: "Up to now our position has been that we would wait for the meeting between the Chancellor and the Governor before making a decision. We will now be keeping our rates under active review."

A spokesman for Woolwich Building Society said: "We will have to take what our competitors are doing into account when reaching our decision."