B&B and Abbey hike rates as funding costs rise

Bradford & Bingley is raising its mortgage rates to counter the margin squeeze that helped to trigger its profit warning on Monday.

Britain's biggest buy-to-let lender, which had to reprice its rights issue and sell a stake to a US private equity group, said yesterday it was raising its rates by up to 0.55 percentage points.

The beleaguered lender was joined by Abbey, one of the strongest competitors in the UK at the moment. The bank, owned by Santander of Spain, has increased rates on some fixed-rate mortgages by up to 0.44 per cent. Abbey had cut rates the week before in a bid to boost market share.

Both banks cited rising funding costs after a jump in interest rate swaps, which are derivative contracts based on interest-rate expectations and borrowing costs. Other lenders such as Nationwide, the UK's biggest building society, have already upped their rates under funding pressure.

B&B raised rates on its buy-to-let range by 0.55 percentage points for fixed-rate deals and 0.45 points on new variable offers. Abbey raised the rate on its main five-year fixed deal by 0.44 per cent after cutting by 0.17 points.

B&B said its increase was a routine exercise in repricing to reflect market costs and stop its call centres being deluged by customers looking for cheap deals. The bank warned on Monday that increased funding costs were squeezing its margins and was hit by a delay in mortgage redemptions, stopping it from adding more profitable mortgages to its books.

Lenders have failed to pass on the Bank of England's interest rate cuts because the cost of wholesale funds has continuedto rise. High mortgagecosts are adding to the housing market's woes, with prices falling at their fastest rate since the early 1990s.

Property prices are likely to fall by 30 per cent before bottoming out, derivatives data showed yesterday. The market also indicated that it could take 10 years for house prices to get back to current levels.

The Tradition Future HPI, which is based on the non-seasonally adjusted version of the Halifax price index, forecasts average British house prices flattening out below £143,000 in 2011 from £186,482 now. The data show British house prices falling 20 per cent in the next two years.

"Ten years under water? It was nine years last time," Tradition Property, the inter-bank derivatives broker, said. That was how long it took for the Halifax price index to recover after it peaked in July 1989.