'Greedy' banks push up mortgage rates

Banks and building societies have been accused of profiteering after official figures showed that they had raised millions of their customers' mortgage bills before an expected cut in interest rates by the Bank of England.

While a cut today should bring some respite for struggling home owners, analysis by The Daily Telegraph shows how banks have not only failed to pass on the previous cut, they have actually raised the average mortgage rate.

Moreover, financial experts warned that even if rates continued to fall this year, the majority of the 11.8 million mortgage holders in Britain were unlikely to see much benefit.

In the past few weeks 10 mortgage lenders, including the Royal Bank of Scotland, Alliance & Leicester and the country's biggest building society, the Nationwide, have increased some of their rates, despite the Bank cutting rates from 5.75 per cent to 5.5 in December.

Bank of England data shows that the average mortgage rate has been inflated. When interest rates were previously 5.5 per cent - in May last year - the average mortgage rate was 5.66 per cent but when rates moved back down to that level in December the average was 5.93.

For someone on a typical interest-only home loan of £150,000, this meant an increase of £33.75 on their monthly bill to £741.25.

Eddie Weatherill, the chairman of the campaign group Independent Banking Advisory Service, said: "Over the last decade the banks have used interest rate changes to massage their own rates.

"When the official rate goes up, they are quick to move. When it goes down, they are slow to pass on the cut to their customers. It is profiteering, and consumers end up the losers."

Britain's five biggest mortgage lenders are all offering deals less generous than those of last summer. Halifax's variable rate mortgage will cost lenders an extra £54 a month, while the Nationwide's deal costs £78 a month more.

The crisis in the global financial markets has made it more difficult for banks to raise money from each other - which spelt trouble for Northern Rock - so they have attempted to shore up their profits by raising cash from their customers.

Mick McAteer, a personal finance expert and the former principal policy adviser at Which?, said: "After the credit crunch banks have attempted to rebuild their profit margins.

Not only have they failed to pass on the full benefits of the last cut, I don't think consumers can expect much comfort from any cut this week.

Alistair Darling yesterday promised measures to breathe life into the ailing mortgage market amid fears that the UK was heading for a housing slump.

In a surprise intervention on the eve of today's interest rate decision by the Bank of England's Monetary Policy Committee, the Chancellor announced he would consult on measures to lure investors back to the credit markets, which provide funding for banks' loans to homeowners.

Mortgage lenders have found it increasingly difficult to access capital from the markets since the fallout from the sub-prime crisis in America. The drying up of the wholesale markets is making it tough for lenders to offer competitive rates to borrowers.

But the Government plans to introduce a new ratings system to try to reassure investors that the securities on offer from UK lenders are good quality. This could bypass the ratings agencies, which have come under fire for failing to anticipate the collapse of the sub-prime markets.
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The Financial Services Authority recently raised fears about 1.4million people whose cheap fixed-rate mortgage deals will expire this year.

Many will struggle to find a new affordable mortgage deal as lenders become stricter about who they hand money to.

In his speech to the Engineering Employers' Federation in London, Mr Darling insisted that the housing market is radically different to the slump of the early 1990s.

Despite three months' of falling house prices, he said low interest rates and low unemployment made the market more resilient.

He also attempted to distance Britain from the U.S., which is in its worst property recession for decades.

House prices in Britain are still underpinned by acute shortages in property supply, Mr Darling argued. .….

The Bank of England is widely expected to cut the cost of borrowing costs for the second time in three months on Thursday at the end of its latest two-day meeting.

Economists polled by Reuters were unanimous in expecting a quarter-point reduction in Bank rate, taking it to 5.25%.

Businesses, though, would be happier with a bigger cut.

"We would welcome a cut to 5% today but we understand the MPC may be reluctant to give a misleading impression of panic," said David Kern, adviser to the British Chambers of Commerce.

"We urge the MPC to move to a 5% rate in two rapid steps. The longer the MPC waits, the bigger the danger that the situation could deteriorate.".….

The Bank of England has cut interest rates by a quarter percentage point to 5.25pc in an attempt to head off a slowdown in the economy.

Halifax, Nationwide, Abbey and Royal Bank of Scotland/NatWest all said they would be cutting their standard variable rates by 0.25% within seconds of the Bank of England's Monetary Policy Committee (MPC) making its announcement. .….

In a statement, the Bank said: “The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued.”

It noted that credit conditions for households and businesses were tightening while growth in consumer spending had eased. Moreover, various business surveys show that further slowing is likely.

“These developments pose downside risks to the outlook for inflation,” the Bank said, hinting that it believed price pressures now showing up in the economy were likely to abate later in the year.

It believed a quarter-point cut “was necessary to meet the 2 per cent target for CPI inflation in the medium term.”….