Some lenders are raising mortgage rates will others follow?

9th March 2012

Despite the Bank of England base rate being held at a record low of 0.5% some lenders are raising mortgage rates, the question is whether other lenders are likely to follow suit?

BBC Newsnight's Andrew Verity examines the issue.

In the dim, distant days before the credit crunch, it used to be that where the Bank of England led, the mortgage lenders would follow. Rates would only go up and down when the Bank of England changed its rates, but four years ago that mechanism got crunched and ever since then, it hasn't been so much the Bank of England's policy but mortgage lenders' finances which have dictated what happens to interest rates.

What's quite worrying is that interest rates can be at record lows for three years and tens of billions of pounds have been printed and still the Bank of England can't hold rates down. So while the Bank tries - and fails - to rein in mortgage costs, which lenders are refusing to follow its lead?

Halifax is putting up its standard variable rate, or SVR, from 3.5% to 3.99%. Bank of Ireland's SVR will rise from 2.99% to 4.49% by September. At RBS, some offset and One mortgage account rates will climb from 3.75% to 4%. Those rises will affect 1.2 million households, just over a tenth of all mortgage borrowers, but expect more to follow.

Mortgage lenders say it's costing them more to get hold of the funds to lend so they have to pass that cost on in higher rates.

Paul Smee, Council of Mortgage Lenders commented: "Mortgage lenders have to attract savings in from the public and they have to offer rates that attract the money. Equally, in some cases they have to go to the wholesale markets to raise money and they have been affected by the general economic situation in the Eurozone. So it isn't as stable a position as you might think when you look at the base rate."

Andrew Verity, from BBC Newsnight asks: "At the moment I don't see any rise in savings rates, in fact they seem to be as low as they ever were three years ago, so why is that a justification for raising mortgage rates?"

Paul Smee, Council of Mortgage Lenders: "It is quite a complicated position and I think some rates are rising, but bear in mind as well that a lot depends on the particular need of the particular lender, their particular view of their mortgage book and what sort of business they want to attract."

But that's not enough to convince the lenders' critics who say their timing is odd. Last year the Eurozone crisis did push up their cost of funds, but raising rates then just as bankers were set to collect fat bonuses might not have gone down that well and lately, that cost of funds has come down.

Steven Bell, Manager, GLC Hedge Fund remarks: "The banks raise their money in a variety of ways. First of all, a lot of us put money with the banks and get nothing at all. Then they raise money broadly to have to put some capital when they lend and that rate - that cost to them if you like of supplying mortgages - did go up last year, it did squeeze, but in recent weeks it's had relief and I must say I'm very surprised that they've put the rate up now because actually that margin has widened."

Andrew Verity, Newsnight: "So actually their money is cheaper than it was a few weeks ago?"

Steven Bell, Manager, GLC Hedge Fund: "Absolutely, it's cheaper for the banks to lend to us and so actually this is the wrong time, in my opinion, for them to be raising mortage rates."

Economists hope that as spring gets under way, so will the economic recovery. More than 800,000 people are in negative equity and another 1.9 million have equity of less than 10%. For those mortgage prisoners, it's very difficult to switch mortgages and when their rates go up, there's very little they can do.

Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.

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