Virgin first to raise rates but savers will not benefit

Virgin Direct yesterday became the first mortgage lender to raise interest rates, pushing its lending rate up by 0.25% to 6.7% following Thursday's quarter-point rise in the bank base rate.

However, Virgin's savers will not benefit from the rate increase. The interest paid on its savings account will be pegged at 5.25%, which Virgin says is in line with its promise to remain within 1% of the base rate until 2001. Other new entrants into the savings market, such as Egg, Sainsbury and Tesco all raised savings rates by 0.25%.

The Bank of England monetary policy committee pushed up the base rate to 5.5%, partly to choke off a housing boom that has sent prices rocketing in the south-east and other popular regions around the country.

The UK's two biggest lenders, Halifax and Abbey National, were yesterday playing a poker game as to which would make the first upward move in mortgage rates. Neither is now expected to raise rates until Monday at the earliest.

If the full increase in base rates is passed on to homeowners, the Halifax standard variable rate will rise to 7.24% from 6.99%, adding an extra £7.45 to the £339 monthly payment on the typical £50,000 repayment mortgage.

Traditionally Halifax announces its rate first, and is followed soon after by other lenders. At the last base rate rise in early September, Halifax increased its rate by just 0.14% rather than the full 0.25%, a move quickly imitated by other lenders. But yesterday Halifax was unwilling to take the lead again, after it took most of the flak following the last increase.

Virgin Direct, a new and relatively small entrant into the mortgage market, took the unusual step of raising rates first. "We are continuing to play fair and straight," said managing director Jayne-Anne Gadhia. New tracker mortgages offered by a variety of lenders, which mirror increases in base rates, will also automatically raise rates by 0.25% over the next few days.

However, the Staffordshire and Leeds & Holbeck Building Societies announced that they will freeze their variable mortgage rates until the end of the year, while Nationwide says it intends to keep its standard rate, currently 6.45%, below the rates charged by its stockmarket-quoted rivals.