A&L raises fixed-rate deals as MPC considers rate cuts

Alliance & Leicester is considering increasing the cost of its fixed-rate mortgages for the second time in a week, despite widespread expectations that the Bank of England's Monetary Policy Committee (MPC) will cut base rates today.

A&L has already withdrawn its most competitive short-term fixed-rate deals in recent days, replacing them with more expensive products. However, the mortgage bank said last night that the pace at which rival lenders were repricing their own deals had now forced it to consider hiking its fixed rates for a second time.

A spokesman for A&L said the lender would make a final decision within days. "Since we announced our price rises, our major competitors have increased their prices further and rates are moving very fast," she said.

A&L is just one of a string of mortgage lenders keen to rein back on borrowing to all but the most credit-worthy of borrowers. The Bank of England said yesterday that lenders had raised prices so quickly during March that the typical two-year fixed rate 95 per cent mortgage now costs 6.64 per cent, the highest figure for eight years. Less risky loans have also been affected with 75 per cent deals now typically costing 5.8 per cent, up from 5.75 per cent at the end of February.

Mortgage analysts expect further rises over the next few days because most lenders are no longer actively competing for business other than at the high-quality end of the market.

Woolwich, the home loans arm of Barclays Bank, is set to announce higher rates on its fixed-rate deals this morning, and has already warned independent mortgage brokers about the increases.

Borrowers had been hoping for some respite from the MPC, which is expected to cut the base rate from 5.5 per cent to 5.25 – or even 5 per cent – despite comparatively strong manufacturing data published yesterday, which said output rose 0.4 per cent over February. However, lenders struggling with funding pressures and increasingly risk-averse lending policies are unlikely to pass on the cut.

The crisis in the mortgage sector has prompted calls for official intervention to help borrowers now struggling to find affordable deals. Alistair Darling, the Chancellor, said yesterday that a working group on mortgage finance, to be led by former HBOS chief executive Sir James Crosby, would consider how mortgage finance markets might be improved to counter the kind of problems seen since the credit crunch.

The Treasury is keen to encourage greater take-up of longer-term, fixed-rate mortgages, which have traditionally been unpopular with UK borrowers, but has also asked Sir James to consider the issues for mortgage funding raised by the credit crisis.

However, while Sir James's investigation could eventually identify measures that would help prevent a repeat of the volatility seen in the mortgage market in recent weeks, he is not expected to publish an interim report until the summer. His final recommendations will be made in the run up the pre-Budget statement in the autumn.

Michael Coogan, the director-general of the Council of Mortgage Lenders, called for policymakers to take action more quickly. "The shortage of funding is creating disruption in mortgage and housing markets now," Mr Coogan said. "While the working group is developing its proposals, we therefore believe there is a need for more immediate action by the central banks, in particular the Bank of England in the UK."

Leading banks have already called on the Bank of England to make more short-term funding available and to relax further the collateral it accepts when lending to the sector. The Bank said yesterday that banks had asked it for £23.5bn worth of reserves for the next month, up from £19.7bn in the current period, the biggest amount since the current financing system with the sector was introduced two years ago.

The funding problems for banks with the biggest exposure to the mortgage market may also be exacerbated by falling house prices. Credit Suisse yesterday warned that HBOS, whose Halifax Bank is Britain's largest lender, would see its tier one capital ratio deteriorate as prices fall.