Lenders ignore Bank rate freeze

Published 14th Sep 2009

Despite the Bank of England base rate freeze, experts are warning that mortgage rates could soar to 10%
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Two of Britain’s biggest lenders hiked the cost of new mortgages last week — one day after Bank rate was kept on hold for the sixth consecutive month.

Royal Bank of Scotland (RBS), 70% owned by the taxpayer, increased the cost of new mortgages by up to 0.7 of a percentage point. The move takes some of its five-year fixed-rate deals from 5.99% to 6.69%, increasing the cost of a £200,000 loan by £1,400 a year.

Nationwide, Britain’s biggest building society, also hiked rates for remortgages last week — by up to 0.2 of a point.

Lenders have consistently put up the cost of new mortgages in the past six months, despite Bank rate being on hold at 0.5% since March. Experts warned that fixed-rate mortgages could soar to 10% when the Bank of England starts to raise rates again, if lenders continue to profiteer.

Fixed-rate mortgages reflect “swap” rates — the cost of funding on wholesale markets — but these, too, have plunged to record lows.

Darren Cook of Moneyfacts, the financial data firm, said: “It’s astonishing to see margins continuing to grow at the expense of borrowers. If mortgage rates continue to increase like this — and they will, the closer we get to the Bank increasing interest rates — we could soon see mortgage rates of close to 10%.”

Research for The Sunday Times shows that banks have also refused to play fair on savings and credit card rates. Here, we look at the worst offenders:

MORTGAGES

Yorkshire building society has increased rates on average fixed-rate deals by 1.76 percentage points — more than any other lender — in the past six months, said Defaqto, the data firm. Its two-year deal is now 5.79%, against 4.03% six months ago, and its five-year fix is 6.55%, compared with 5.36%. Northern Rock, the nationalised bank, is the second-worst offender, with its average two-year fix up 0.6 points to 5.49%.

SAVINGS

NatWest has cut 1.51 points off its eIsa rate in the past six months. At the start of the tax year in April, savers were able to net a rate of 3.51%. Today, it pays as little as 2%.

Meanwhile, Tesco has cut its easy-access rate by 0.5 points to 1.5%, and ICICI has lowered rates on its once-popular HiSave account by 0.75 points to 1.7%.

Rachel Thrussell at Moneyfacts said: “There’s no excuse. This has been a tough enough time for savers without unnecessary interest rate cuts.”

CREDIT CARDS

RBS has hiked the rate on its Classic card — a best-buy six months ago — from 12.9% to 16.9%, according to Moneysupermarket. The four point increase will cost customers an extra £100 a year on the average balance of £2,500. Abbey has increased its purchase rate from 15.9% to 18.9%.

You can do better than that

Financial institutions may have refused to play fair in the half-year that Bank rate has been static at 0.5%, but there are ways to outdo them.

Go for consistent savings rates

The Albion 30 account from Leeds building society has been one of the most consistent notice accounts over the past 18 months, says Moneyfacts, the financial data firm. It pays interest of 2.5% on balances of £5,000 or more. The notice period is 30 days. Among no-notice accounts, Beverley building society’s postal account has paid 1.65% over the past three years.

Lock in to the top five rates

The Investec High 5 account pays the average of the five top-rate savings accounts, as published by Moneyfacts each week. The current rate is 3.15%. It requires an opening deposit of at least £25,000 and three months’ notice to make a withdrawal.

Switch to 0% APR

Virgin Money Mastercard gives the longest 0% interest period on balance transfers — 16 months. There is a handling fee of 2.98%. The Santander credit card, from Abbey, promises 0% on balance transfers for 15 months with a 3% balance transfer fee.

Pick the right mortgage rate

First Direct has the market-leading two-year fix at 3.49% for customers with a 40% deposit. The fee is £1,298. Repayments must be made from a First Direct current account and deals are offered on a repayment basis only.

Most brokers are suggesting fixing for longer as current two-year deals will finish when Bank rate is expected to rise.

If you want to protect yourself, HSBC offers a five-year fix at 4.95% with a 40% deposit and £999 fee. For those with just a 25% deposit, HSBC has the top tracker, at 2.95%, while Newcastle building society has a five-year fix at 4.99%.

Source: ' Sunday Times '

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