Loan rates defy logic

Leading mortgage lenders are playing fast and loose with borrowers over loan rates despite government warnings to clean up their act.

That's certainly how it looks to some observers after the Halifax, Abbey National and others this week raised their mortgage rates to around 7.24% following the recent base rate rise.

On the surface this seems pretty fair - after all, the rise matches the 0.25% increase announced by the Bank of England last week. But on closer examination, there would appear to be something odd going on. The bank base rate now stands at 5.5% - exactly the same as it was on March 1 this year. Yet on that date, the Halifax's mortgage rate was 6.95% and Abbey National's was 7.05% - well below present levels.

In other words, the base rate is the same as eight months ago, but millions of borrowers are paying significantly more than they were then. Halifax borrowers with a £60,000 repayment loan on the standard variable rate of 6.95% which applied from March 1 were paying £409.75 a month. Now, with the standard variable rate at 7.24%, they will be paying £420.26 - an extra £10.51 a month, an extra £126.12 a year.

Abbey National borrower Geoff Booth spotted the apparent anomaly in the figures. He claims lenders are exploiting interest rate fluctuations to increase their profits and says Abbey has effectively increased its standard variable rate by 0.19% between March and December, despite the base rate returning to the same level.

"Imagine if the base rate had stayed at 5.5% throughout. There is no way they would have got away with raising mortgage rates by 0.19% without there being a storm of protest," says Mr Booth, 55, of Knebworth, Herts. Lenders insist that, contrary to appearances, the amount they are making out of their borrowers has not increased since March. They argue that while the base rate may be the same, the cost of buying the money which they then lend out again has gone up significantly. "We buy the money we lend out to people from the money markets, not from the Bank of England," says a spokeswoman for Cheltenham & Gloucester. "The money market people who sell the money expect interest rates to increase further still, so the money is being priced by them more expensively than it was in February [when the base rate was cut to 5.5%]."

Andrew Pople at Abbey National put it even more succinctly: "When our cost of raw material goes up, we have to pass that on." The rate at which Abbey buys funds for mortgages has gone up from 5.5% to 5.83% since February, he adds. This argument however, runs counter to the way lenders usually respond to base rate changes when they claim that the interest level they charge variable-rate borrowers is influenced by the returns paid to savers.

Whichever side you take, mortgages are becoming more expensive. Halifax, Abbey National, C&G, Northern Rock, Nationwide and Bradford & Bingley raised their rates by around 0.25% this week. Halifax's and Abbey's new standard rate is 7.24%, which means a typical borrower with a £60,000 repayment loan will pay an extra £9.06 a month.

So what does all this mean if you're thinking about a mortgage?

With interest rates expected to rise further, many people will be keen for the security offered by a fixed-rate loan. Long-term fixes on the market have edged up to 7%-plus, but there are still some good deals around, says Simon Knight at mortgage broker Independent Mortgage Collection (IMC).

Bradford & Bingley is offering a rate of 6.64% fixed to March 2005 with no early redemption penalties after that date (with a deposit of at least 15%), while Lloyds TSB has a deal fixed at 6.65% until December 2004, again with no overhanging penalties (deposit of 20%-plus required). IMC is offering a loan funded by Halifax Mortgage Services fixed at 6.24% to January 2005, with no penalties after the period.