Government-owned lender increases mortgage rates

Published 26th Nov 2008

Northern Rock hits homeowners with a rise in fixed-rates despite the Government calling on banks to reduce borrowing costs

Northern Rock, the state-owned lender, has embarrassed the Government by increasing rates on its most competitive deals despite Government calls for high street lenders to pass on cuts in borrowing costs.

This morning the lender, which was nationalised in February, increased interest rates on its fixed-rate deals by up to 0.3 percentage points, adding up to £40 a month to the cost of monthly interest-only repayments on a £150,000 loan. Its most competitive one-year fix has jumped from 3.99 per cent to 4.19 per cent.

In the last week MPs and the Government have warned banks that is vital for the economy for they boost lending and reduce interest rates in line with the falling base rate.

Melanie Bien, director of Savills Private Finance, a broker, said: "'Borrowers will be bemused that the state-owned lender is raising its fixed rates when the government is pushing lenders to pass on rate reductions. Northern Rock's original reductions were too aggressive, making it difficult to cope with demand. It is evidence of the fact that the majority of lenders are not offering competitive fixes."

Earlier this month the Bank of England dramatically reduced interest rate by 1.5 per cent in an effort to kick-start cheaper lending. It is now reportedly considering another large reduction next month after wide-spread disappointment that mortgage rates have not fallen as much as expected.

Northern Rock was one of only a handful of lenders to launch cheaper fixed rate deals after a considerable fall in swap rates, the money markets which banks use to fund fixed-rate lending. This week two-year swaps have fallen to their lowest level in more than 5 years. Yesterday two-year swaps were at 3.23 per cent.

Aaron Strutt, of Chase de Vere Mortgage Management, said: "It will certainly be worring for homeowners that a nationalised bank is raising rates at a time when wholesale funding is getting cheaper."

Lenders have more than tripped the profit margins on fixed-rate lending in the last year. The gap between the cost of funding new fixed-rate lending on the money markets and the rates that banks charge hard-pressed customers has jumped from 0.8 percentage points last year to 2.6 per cent today, according to Moneyfacts.co.uk, the financial website.

The market for fixes also remains limited. Moneyfacts says there are 894 fixed-rate deals available today, compared to 1,774 deals at this time last year.

Michelle Slade, of Moneyfacts.co.uk, said: "The margin between the average fixed rate and swap rates continues to increase. Borrowers should be able to benefit from fixing their rates at much lower levels by now, but the cuts aren't filtering through."

Source: ' Times '

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