Bank cuts base rate, but lenders raise mortgage rates

Yesterday’s cuts in the Bank of England’s base rate, intended to help prevent the slide towards recession, were immediately undermined as lenders increased mortgage rates.

The third cut in the base rate since December will bring relief to the estimated six million home owners with tracker and variable rate mortgages, helping them save more than £30 a month on a £200,000 mortgage.

However, those on cheap fixed-rate deals which are due to expire this year may face financial difficulties.

Nationwide and Alliance & Leicester are among a number of lenders who increased their fixed-rate offers by up to 0.35 per cent.

“Many lenders are yet to pass on the recent base rate reductions – instead they are busy increasing rates, demanding larger deposits, tightening lending criteria and, in some cases, withdrawing deals from the market altogether,” commented Ann Robinson, director of consumer policy at uSwitch.com.

However a number of big lenders including Halifax, Nationwide, the Woolwich, Cheltenham & Gloucester and First Direct announced within minutes of the Bank’s decision that they would cut their standard variable mortgage rates by 0.25 per cent.

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Bank holds interest rates

The Bank of England’s monetary policy committee (MPC) has decided to keep interest rates at 5.75 per cent for at least the next month.

Although rates have not risen since July, that was the fifth rise within 12 months and there were concerns earlier in the year that rates would hit six per cent before the end of 2007.

However the inflation rate currently sits at 1.9 per cent, below its target level of two per cent and the current problems in the financial markets are making further rises less likely.

In a statement that accompanied the decision, the MPC said that it had considered carefully the effects that recent credit market problems, brought about by the collapse of the US sub-prime borrowing market, could have on the inflation rate.

Responding to the news, the Council of Mortgage Lenders (CML) welcomed the bank’s decision to hold rates steady at 5.75 per cent.

Micheal Coogan, director general of the CML, said: “Credit conditions have tightened since the rate went up in July, and a further increase would have added to the liquidity problems we are already seeing in some sections of the market.

“At the same time, there is now much clearer evidence that the cumulative effect of five rate rises since last August is slowing activity in the housing market.”

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