Tracker mortgage rates soar

The gap between the cost of tracker mortgages and official interest rates has soared five-fold during the past year, figures showed today.

Arrangement fees on the mortgages, which move up and down in line with the Bank of England base rate, have also trebled, according to mortgage group mform.co.uk.

In October last year, lenders were charging an average of 6.056% on lifetime tracker deals for new customers, or around 0.3% more than base rate, which was then 5.75%.

But at the beginning of October this year the average lifetime tracker rate was 5.950%, or 0.95% above base rate, based on the official cost of borrowing of 5% at the start of the month.

The differential has widened further during the month, as the average tracker rate has risen to 6.136%, while the Bank rate has fallen to 4.5%.

Most lenders do not pass on reductions in interest rates to new tracker customers until November 1 but, as things currently stand, this gives a differential of 1.636% - five times more than in October last year.

At the same time, arrangement fees for the deals have also soared from an average of £239 in October 2007 to £750 now.

The problem for lenders is that, while the official cost of borrowing has fallen, this has not been reflected in wholesale funding costs.

One of the key inter-bank lending rates, three-month Libor, upon which many tracker deals are based, was just under 6.25% yesterday, a massive 1.75% above the official cost of borrowing.

The differential between tracker rates and the base rate has been steadily rising during the past year as the credit crunch intensified and banks became increasingly reluctant to lend to each other.

It is hoped that recent Government and international initiatives, including the part-nationalisation of three of the UK's banks announced this week, will start to get money markets moving again, although so far inter-bank lending rates have been slow to respond.

Francis Ghiloni, marketing and business development director at mform.co.uk, said: "In the past a tracker mortgage meant you'd pay base rate or a rate close to it but over the past year we're increasingly seeing major lenders charge a premium for what has traditionally been a popular product.

"For confidence to return to the market lenders have got to more closely reflect the Bank of England base rate. Otherwise it looks like they are improving their margins and not helping customers."