Credit crisis pushes Halifax to raise tracker mortgage rates

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The Independent Online

Britain's biggest mortgage lender yesterday blamed the continuing turmoil in the world's credit markets for a decision to hike the price of 20 of its new "tracker" mortgages.

Halifax said the rises were down to the sharp increase in short-term interest rates that banks pay when they lend to each other. Its decision follows a similar move by Abbey – owned by Spain's Banco Santander – on Tuesday.

It came as Northern Rock said it had stopped offering mortgages to so-called "sub-prime" clients that it had been serving through a joint venture with Lehman Brothers, the US investment bank.

Tracker mortgages are typically set at a certain level above the Bank of England's base rates, currently 5.75 per cent. They guarantee that, when base rates move, they will move by the same amount, either up or down.

However, the banks and building societies that offer this type of loan tend to finance them by borrowing on the international money markets. Because of the turmoil sparked by the US sub-prime lending crisis, whose contagion has spread throughout the financial system, have become highly reluctant to lend to each other.

That has meant the three-month interbank lending rate, Libor, soaring to 6.9 per cent, more than a percentage point above base rates – a highly unusual situation. When the Bank of England last raised base rates to 5.75 per cent, Libor stood at around 6 per cent, and for the first six months of the year, it was just 0.3 per cent above the base rate.

Because of this rise in Libor, the cost of offering trackers has soared, and banks such as Halifax and Abbey have reacted by increasing the margin above base rates charged to new customers. Both banks have stressed that existing customers will not be affected.

Mortgage brokers say the move by the banks is significant because the turmoil on the world's money markets had previously only affected those who lend to riskier consumers, such as the self-employed or those with poor credit histories. Lenders in these markets have been steadily raising prices and tightening lending rules for several weeks.

Ray Boulger, from the broker John Charcol, said: "It means that the effect is now being felt by borrowers across the board. Abbey and Halifax are two of the biggest lenders to mainstream customers.

"The problem for lenders is that trackers are linked to base rates – they have to be, because that is what consumers understand – but their financing costs are linked to Libor.

"What will be interesting is whether they try to put their standard variable rates up as well. This is a relatively small part of the market, but it would be another way for them to claw back some of the costs."

James Cotton, from L&C Mortgages, also a broker, warned: "I don't think we have seen the last of this, because the level of difference between Libor and base rates is putting pressure on lenders – but on the flip side, we have been noticing some fixed-rate mortgages coming down in price because they tend to be linked to longer-term interest rates, and the expectation now is that base rates will come down."

Standard Life is expected to follow suit; Capital Home Loans, which deals with more specialist markets, is expected to increase rates on Monday.

Halifax's head of communications Shane O'Riordain said: "We are doing this because of the turmoil in world markets, but the average increase above base rates is typically only 0.1 per cent, and the last time we moved prices down."

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