View from City Road: A turning point for home loans

Remember the week in February when a handful of building societies withdrew their fixed rate mortgages for a rethink on rates? It was the first tremor of an earthquake in the mortgage market, caused by sharply higher rates in the professional bond markets.

Within weeks of that February tremor, fixed rates that started the year nearly a percentage point below the variable rate shot above it. Five- year fixed-rate mortgages are now well over two percentage points more expensive than floating mortgages, and it is a rare borrower who opts for one.

No longer do building societies have to offer big incentives for home owners to take floating rate mortgages, which have always generated higher and more reliable profits than fixed mortgages. Fixed-rate mortgages have become uncompetitive of their own accord.

Strange, then, that Halifax should promise new borrowers cash incentives of up to pounds 6,000 to take out a conventional floating mortgage - strange, that is, until you look beneath the marketing hype to see what is actually happening.

The truth of the matter is that these cash handouts are for most borrowers worth a lot less than the discounts that have been on offer to attract them away from fixed mortgage deals. To judge by some of the discount deals, lenders have been prepared to give away mortgages in a ferocious scramble for business.

The logic was that the lost profit margins in the early years of a discounted mortgage would be more than made up later, when borrowers start paying the full whack.

Yesterday Halifax was denying that its switch from discounts to a lower cash rebate had anything to do with interest rates. But the fact is that our biggest building society has, by a roundabout route, made new mortgages dearer and the reason it is doing so is to cope with the strong likelihood that the the next move in interest rates will be up. This could prove, in its own way, a turning point as significant as that February tremor.