Interest Rates: Big lenders move quickly to raise cost of borrowing

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The Independent Online
TWO of Britain's largest lenders moved swiftly to raise their rates leaving millions of home buyers facing higher mortgage payments.

Abbey National, the second largest lender with two million borrowers, is raising the standard variable rate by 0.35 per cent to 8.09 per cent. Nationwide, with 1.2 million borrowers, is pushing rates up by 0.4 percentage points to 8.14 per cent.

This will mean an increase in monthly payments on a pounds 60,000 interest-only loan of pounds 18. The changes take place from Friday for new borrowers and from 1 October for existing borrowers. One- third of Nationwide's borrowers are on annual review so their monthly payments will not be adjusted until February.

Yesterday, housing experts were divided over the precise impact of the increase in mortgage rates but most thought that it would stall the fragile recovery.

Barry Bisset, housing economist at Nationwide, said: 'The market is at best stable. I can't see that this will improve it, but I don't think it will make much difference.'

Charles Toner, managing director of Abbey National's retail division, said that the move was prompted by the need to stay competitive on savings rates, which will be increased later. 'We have moved by no more than was necessary,' he said.

Garry Skelton, head of mortgages at Barclays Bank, said a small rise in rates now would not do as much damage to the housing market as a larger rise later.

Eva Lomas, president of the National Association of Estate Agents, said people would take a few weeks to get used to the idea of higher mortgage rates. 'If this is going to improve the economy, that itself should make the market stronger. October is usually a good selling month.'

But Peter Constable, chairman of the Ombudsman for Corporate Estate Agents, was less sanguine: 'The increase in mortgage interest rates will cause major setbacks in the housing market and choke off yet another fragile recovery.'

The Halifax said that it would increase rates with great reluctance. 'There are six savers for every borrower and we have to consider them,' a spokesman said.

Other lenders are against raising interest rates while the housing market is so fragile. Peter Robinson, deputy chief executive of the Woolwich, with 550,000 borrowers, said there was no justification for increasing building society rates. 'They have more than enough savers' cash and want to encourage homebuyers,' he said. But he added that if most lenders increase their rates, the Woolwich would be forced to follow.

Adrian Coles, director general of the Council of Mortgage Lenders, said any increases would put back the prospects of a recovery in the housing market. 'It is damaging to confidence because people will think rates will go up again. The one silver lining is that the markets may think this is a one-off correction and five-year fixed rates can start to come down again.'

But Ian Darby, marketing director at mortgage brokers John Charcol, said money markets were predicting further rate rises. He pointed out that building societies did not cut their rates when base rates dropped from 5.5 to 5.25 per cent in February.

'They have susbstantial margins, and as the housing market is so sluggish I would have thought that they would have swallowed the whole thing and not moved at all,' he said.

Mike Jones, a past president of the National Association of Estate Agents who works in Cardiff, said: 'This is a step in the wrong direction. Any increase in mortgage rates could jeopardise this fragile market.'

(Graphic omitted)

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