Nationwide becomes the latest lender to raise mortgage rates

The cost of borrowing money is continuing to rise this month, despite a cut in the Bank of England base rate at the start of December and a sharp reduction in Libor, the rate at which banks lend to each other, over the past few weeks.

Yesterday, Nationwide, the UK's largest building society and fourth-largest mortgage provider, became the latest lender to announce price rises across its tracker mortgage range. It will increase rates for new borrowers by up to 0.15 percentage points as of tomorrow.

Brokers said Alliance & Leicester is gearing up for a similar move this week; Woolwich, which is owned by Barclays, announced price hikes for new customers only last week. Other lenders are expected to follow suit in the coming weeks.

Melanie Bien, a director at the independent mortgage broker Savills Private Finance, blamed the credit crunch for the price rises. "The problem is that while three-month Libor has fallen from the highs seen last autumn when the credit crunch hit, the securitisation market – a crucial funding source for lenders – has all but dried up, making it harder for lenders to raise funds to provide loans to homebuyers," she said.

"Banks are adopting a 'wait and see' approach, looking for quality business rather than chasing market share. This means there are fewer products available, and what there is has higher rates and lower maximum loan-to-values."

Ms Bien added that while there are still some competitive rates on the market, these are generally only available to those with deposits of at least 10 per cent.

Though economists are predicting further base rate cuts this year – perhaps as soon as next month – Ms Bien said borrowers should not expect the cost of mortgages to come down quickly in the near future.

Nationwide is raising the cost of all of its two-year tracker mortgages by 0.1 percentage points. Its cheapest tracker after tomorrow will now be priced at 5.53 per cent for house purchases and 5.63 per cent for remortgages – both with a £1,499 fee. Ms Bien said it was becoming increasingly hard to find a tracker deal that is below the Bank of England base rate, which stands at 5.5 per cent.

The building society conceded yesterday that it had been forced to raise its rates because of the increase in the costs of funding its products. "The costs of funding remain high and we have found it necessary to follow other lenders who have recently increased their rates," said Matthew Carter, divisional director for mortgages at Nationwide.