Half-point rise in mortgage rate looms

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The Independent Online
MORTGAGE rates may have to rise within the next few days, building societies are warning. Intensifying financial pressures on the societies have made an increase look almost inevitable.

The pressures grew despite last Monday's move by National Savings to cut the highly competitive savings rate offered on its First Option Bond by half a percentage point to 7.25 per cent.

The bond, launched two weeks ago, took in more than pounds 100m within five days, and money has continued to flow into government coffers in large amounts, even after the rate cut.

Building societies are expecting an even larger loss of depositors' funds this month than the pounds 314m net outflow in June, the worst month for deposits in six years.

Because of seasonal factors, such as people paying for holidays, August and September are also likely to be bad.

'There is a limit to how long you can watch the money walk out of your door,' said John Bayliss, general manager of the Abbey National, the second largest mortgage lender. 'One of the smaller societies could crack and raise its mortgage and investment rates in the next few days. But it might take a couple more weeks.'

By raising their deposit rates to more attractive levels, societies would have to increase mortgage rates to maintain profit margins. They believe any rise in mortgage rates is likely to be about half a point, taking them to about 11.25 per cent.

It would be the first rise in mortgage rates since November 1989, when they went above 15 per cent. Rates have fallen steadily since the middle of 1990.

An increase would have a damaging effect on house prices, which are showing no signs of recovering from their two-year depression.

The Halifax, the largest building society, said that although it had no immediate plans to change its interest rate structure, 'we are keeping a very close eye on our rates'. The underlying problem of attracting more deposits had not gone away.

Mortgage lenders will release figures this week showing that they repossessed more than 30,000 homes in the first six months of the year. In January serious arrears cases had nearly doubled from the year before to 280,000, but repossessions for 1992 should fall to about 70,000, 5,000 fewer than 1991.