Banks raise cost of fixed-rate home loans

Most banks and building societies are either raising the interest rates on their fixed-rate mortgages and bonds, or signalling that they are preparing to do so next week.

This follows a strong rise in interest rates on the money market, which is where providers of fixed-rate products have to borrow money to ensure that they can finance their commitments several years ahead. Ironically, some providers had been holding off until the money market settled, so yesterday's declines of nearly 0.1 per cent in rates for periods of one to five years may have prompted them to move. Variable rate mortgages, whose interest rates are more closely tied to Bank of England base rates, are largely unaffected.

Northern Rock, Cheltenham & Gloucester and Chelsea building society yesterday followed Abbey National, Halifax, Nationwide and Woolwich in increasing the cost of their fixed-rate mortgages by up to 0.5 per cent. Bradford & Bingley, Norwich & Peterborough, Chelsea and Woolwich increased their fixed-rate bond rates by a similar amount.

Skipton, Norwich & Peterborough and Yorkshire building societies said that they were either reviewing the position on mortgages, or were due to hold board meetings early next week to decide what to do. Others, including HSBC, said they had no plans to move, but were not expected to be able to hold out against the trend for long. Any lender that does not increase its fixed-rate mortgage is soon likely to be swamped with applications.

A Nationwide spokesman said: "In order to fund fixed-rate lending we have to buy tranches of money in the City. Over the past week or so we have seen the rates available increase in cost by broadly the same amount by which we have had to adjust our rates. I think there has been a change in sentiment regarding both the UK and global economy - increasing consumer confidence has led people to believe that the next move in general interest rates will be up, even if that may not be until next year."

Ron Stout, a spokesman for Northern Rock, said: "We cannot afford to be out of line with the market for long."

Tanya Mills at Yorkshire building society said: "The more people pull their existing mortgages in favour of ones with higher interest rates, the more competitive we are becoming. Money market rates are upwardly volatile, but there are signs that they are stabilising, so we may re-price."