Mortgage war hots up

Yesterday's surprise increase in the Bank of England base rate from 5% to 5.25% immediately intensified the price war in the mortgage market, with Nationwide Building Society vowing to keep rates on hold, in contrast to Halifax, which raised its rates within minutes of the monetary policy committee's decision.

In the first increase for 15 months, Halifax raised its standard variable rate from 6.85% to 6.99%, adding an extra £8.64 a month in payments on a £100,000 mortgage.

The rise, expected to be matched by Abbey National and other demutualised lenders over the next couple of days, comes into effect immediately for new customers and from October 1 for Halifax's 2.5m established borrowers.

Halifax's move significantly widens the price gap between the market-quoted banks and the remaining building societies, led by Nationwide.

Yesterday Nationwide said it will hold its standard variable rate at 6.45%, or 0.54% below the Halifax rate. Chief executive Brian Davis said: "Our bank competitors are widening their margins, and despite record profit figures are quite comfortable with making even greater profit at the expense of their customers."

The base rate rise poses a dilemma for new lenders such as Standard Life Bank and Virgin, which have grabbed market share by chasing interest rates downwards. But they may now march rates back up. Virgin yesterday raised its mortgage rate by 0.25%, while Standard Life said rates were under review.

Savers will see little immediate benefit from the base rate rise, despite suffering sharp declines in income when base rates tumbled. None of the major savings institutions raised rates apart from Tesco, which lifted its rates by 0.25 of a percentage point.

Egg, the loss-making Prudential subsidiary which has taken £6bn from 550,000 savers since its launch last year, will be forced to raise its savings rates in line with its promise to stay 0.5% above base rate until January 1.

Its basic account pays 5.5%, which will now have to rise to a minimum of 5.75%. Halifax says its savings rates are under review and that details will be announced later in the month.

The base rate incease was prompted by fears of a house price boom and bust - yet housing market experts predict that it will have little impact on the market.

Neither Halifax or Nationwide are changing their forecasts for price rises this year of 8-9% nationally, and Halifax is standing by its forecast of a further rise of 8% next year.

Halifax chief economist Martin Ellis said: "I don't think we are in a boom - house prices are still very affordable in a historical context, and even with today's rise borrowers will be paying significantly less in interest than a year ago."

The 1980s house price boom was choked off only when mortgage rates soared to 14-15%, says Richard Donnell at property consultant FPD Savills. "The effect of this rise will be minimal. We are expecting a peak in base rates in this cycle of 6-6.5%, much lower than the end of the 1980s."

The switch to fixed rate mortgages in recent years will further reduce the effect of the rate rise. Around half of the mortgages taken out over the past two years have been on fixed rates. Over the past month fixed-rate offers have risen to reflect expectations of rising base rates; they were unaffected by yesterday's rise.