Mortgage rates rise to beat the Bank of England

Published 03rd Mar 2009

High street banks hike rates on deals pegged to the base rate ahead of an expected cut in base rate on Thursday
James Charles

Woolwich, which is owned by Barclays, has raised the cost of its mortgages pegged to the Bank of England base rate ahead of an expected cut in the base rates this Thursday.

The UK's sixth biggest mortgage lender has increased fixed and tracker rates by up to 0.3 percentage points. A two-year tracker for borrowers with a 40 per cent deposit has increased from 2.74 above base to 2.99 above base. The fee is £995.

It blamed the move on an increase in mortgage funding costs during the past few days. It added that it had also seen “unprecedented levels of demand” for its products, and it needed to control the level of business it was receiving to maintain its service levels.

Other lenders are expected to follow suit and reprice tracker products this week.

The margins on tracker products have been climbing in recent months as lenders protect profit margins in the face of the tumbling base rate. The margin on the average two-year tracker rate has climbed from 0.48 points above base in August 2007 to 2.99 above base, according to Moneyfacts, the financial website.

Aaron Strutt, of Chase De Vere Mortgage Management, a broker, said: "The few lenders still offering base rate trackers have previously been quick off the mark to withdraw their deals in anticipation of a cut. The high margin on the majority of them makes them un-competitive – especially as fixes are so low. Many borrowers sitting on their lenders standard variable rate (SVR) are better off staying on it. However, borrowers should not expect any cut to be passed on in full."

Woolwich has also taken the unusual step of introducing a cap on its new deals limiting the effect of future increases in the base rate. Increases to the base rate will not be passed on to borrowers if it rises above 3 per cent. It means a tracker pegged at 2.99 above base will never rise above 5.99 per cent.

A spokeswoman said: "Our lifetime tracker mortgages are hugely popular, especially while the base rate is so low. However, we do not know where rates might be in the next year or beyond and that may cause some nervousness about committing to a tracker.

"We've therefore introduced a cap on both the lifetime and offset tracker mortgages so customers can be certain that any changes to base rate above 3 per cent will not affect their mortgage rate."

Mr Strutt added: "I haven't seen a capped rate from a mainstream lender for four years. Borrowers know that the base rate will have to increase at some point in future, which could mean a sharp rise in repayments, so it is welcome that Woolwich is trying to protect new tracker customers from a shock later on."

The Monetary Policy Committee (MPC) could reduce base rates again as the economy continues to slide towards a deep recession. It currently stands at 1 per cent, its lowest ever level.

Experts are divided about whether the MPC will opt to cut rates further towards zero or resort to other measures to boost the economy, including quantative easing, essentially printing money.

Howard Archer, economist at IHS Global Insight, the consultancy, said: "There is absolutely no doubt that the MPC is poised to take further action. It is very evident that quantitative easing is now going to take the leading role in the Bank of England's further efforts to stimulate economic activity. It also seems most likely that the Bank of England will lop another 50 basis points off interest rates, although, this is not a cast iron certainty."

Source: ' times '

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