Societies in disarray after bond rate cut: The outlook for mortgage rates was uncertain last night after National Savings' cut the interest rate on its new bond. Vivien Goldsmith and Maria Scott report

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The Independent Online
LAST NIGHT'S sudden move by National Savings to cut the interest rate on its First Option Bond threw building societies into confusion.

Cheltenham & Gloucester Building Society, which raised its mortgage rate from 10.75 to 10.99 per cent at the weekend, now says that it may bring it down again, and Woolwich Building Society welcomed the Treasury move, saying it made a mortgage rate rise 'most unlikely'. Other lenders say that a rise is on the cards.

Andrew Longhurst, chief executive of C&G, said: 'I'm delighted at the news. The Government is now setting a more realistic rate. We may be able to reduce the mortgage rate. We expect to make an announcement before the end of the week.'

However, Mike Whitehouse, operations director at Halifax Building Society, said the cut on the bond would ease pressure on building societies but did not solve all the problems. 'We are competing with many institutions other than National Savings,' he said.

Alliance & Leicester Building Society, which was due to announce a rise in its mortgage rate today, said that it was not a foregone conclusion that the rise would now be abandoned.

John Day, assistant general manager, marketing, said that societies had suffered huge outflows of cash before the launch of the new bond. The society had also been expecting a base-rate cut that had not materialised.

The new bond, paying 7.25 per cent after deduction of basic rate tax, goes on sale at noon today. Applications posted over the weekend would be accepted at the old rate of 7.75 per cent as long as they arrived at the Glasgow office by noon today.

Halifax, along with other societies, has been looking closely at rates. Mr Whitehouse said: 'We have no immediate plans to increase our rates but if other societies do we will have to review our position.'

Competiton from the First Option Bond has been blamed for the pounds 315m net outflow of funds from societies last month, the second- highest on record. In May, they enjoyed a net inflow of pounds 179m.

A spokesman for National Savings denied that the move was caused by the rise in C&G's mortgage rate and the threat that other societies would follow suit. 'We achieved a greater than expected funding performance in the first two weeks of sale,' he said.

Mortgages on repossessed houses, and on the homes of people behind with payments by at least six months, climbed to a record 7.06 per cent of all building society lending at the end of March. The figure, in the Building Societies Commission's report for the year to April, jumped from 6.8 per cent at the end of 1991 and 4.38 per cent at the end of 1990.