Cheap mortgages end

Nationwide building society, Britain's third-largest lender, signalled the end of cheap mortgages on the high street yesterday by raising interest rates on most of its products.


The lender said the rises, which cover a range of capped, fixed-rate and discounted variable-rate mortgages, would take effect immediately for new customers.


After the announcement, other big lenders, including the two largest - Abbey National and the Halifax - admitted they had also raised most of the interest rates on their discounted products.


Mortgage customers have become used to ever-decreasing rates since last October, when the Bank of England began cutting base rates. Since then base rates have declined from 7.5 per cent to 5.5 per cent.


Intense competition among lenders has led to a huge growth in the number of discounts, leading to further cuts in mortgage rates. Some fixed-rate mortgages have undercut the base rate by as much as four percentage points. A Nationwide spokesman said rates on three- to five-year fixed, capped and discounted variable rates would be most affected.


A five-year fixed rate for a customer remortgaging their home will increase by 0.34 per cent to 6.19 per cent. A homeowner swapping their ?60,000 loan to the Nationwide but not moving home will be ?17 a month worse off. A customer buying a home with a new mortgage will fair slightly better - the four-year fixed rate offer will go up by 0.3 percentage points to 5.89 per cent.


The Abbey National has similarly raised its rates but disguised the exact figures by relaunching all its products with different conditions attached. The Halifax, which had been offering large discounts on its variable rate mortgages, pared this back by 0.2 percentage points.


All the lenders blamed the rises on the increasing cost of borrowing on the international money markets.


The Nationwide spokesman said: 'Money market rates have gone up in the last three to four weeks, and this adds to the cost of our long-term borrowing.' He said the building society, which has more than one million mortgage customers, would only pass on the rises to new customers. With the United States economy still growing strongly despite the global slow-down, financial markets have begun to reassess the outlook for interest rates.


Although the cost of borrowing is still expected to drop in the UK by half a percentage point by September, interest rates are thought more likely to rise in the US.


The US economy appears to have shrugged off the effects of the financial turmoil which began in Asia two years ago, and dealers believe the US Federal Reserve chairman, Alan Greenspan, may decide to nudge up the crucial Fed funds rate to contain inflationary pressures.


The prospect of higher US rates has forced 10-year UK government bond yields up, from a low of 4.25 per cent to 4.5 per cent. This makes it more expensive for lenders such as the Nationwide to borrow long-term money.


'AIf bond yields rise obviously it gets more expensive for them to raise money, and so they have decided to pass on the extra costs to other people,' said one City analyst.


The rise in rates for fixed-rate mortgages has seen homeowners switch to variable rates, tied to the UK base rates. Many customers are still on fixed-rate mortgages taken when rates were high.