Defiant lenders push up costs for home buyers

Defiant lenders push up costs for home buyers

Two of Britain's largest mortgage lenders, Nationwide and Alliance & Leicester, brushed aside a quarter-point cut in interest rates from the Bank of England yesterday and announced rises to some of their most popular fixed-rate deals.

Nationwide said it was raising a range of fixed-rate offers and withdrawing others. Fees on several of its products were put up 40% to £699. Alliance & Leicester announced a rise of between 0.2 and 0.3 percentage points on fixed-rate deals it had already increased by 0.35 points on Monday. Abbey and Woolwich also raised their fixed-rate offers this week.

Melanie Bien, of mortgage broker Savills Private Finance, said: "The Bank's decision does not necessarily mean the pricing of new mortgages will come down. Indeed, lenders have recently been moving in the opposite direction. This is bad news for those coming to the end of a fixed or discounted deal who are looking to remortgage."

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Fixed-rate deals have become the battleground on which lenders have waged a long-running price war. Last July they accounted for 77% of new loans, but as the most competitive products have been withdrawn, the proportion dropped to 52% of new mortgages for February.

The price of fixed-rate deals is linked to future expectations for interest rates - as expressed in the market for interest rate swaps - rather than the bank rate. Last June, an intensely competitive market had driven two-year fixed-rate mortgages down to 6.1%, below the 6.3% quoted for two-year swaps. Lenders were able to make small returns on what appeared to be loss-making loans by adding on arrangement charges.

By last month, however, two-year swaps had declined to 5.16% while the average two-year fixed rate mortgage rose to 6.2%. At the same time, lenders have been further building their margins with a series of increases in arrangement fees.

Meanwhile, lenders are shutting their doors to riskier home loans, in some cases offering prohibitively high rates. George Buckley, UK economist at Deutsche Bank, said data from March showed homeowners with 25% equity in their property had been able, on average, to secure two-year fixed deals at 5.8% while those with 5% equity were forced to accept similar deals at 6.64%. Before the credit crunch, the gap between these deals had been as low as 0.24 percentage points. "There is a big retreat from risk going on," he said.

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