Lenders in a rush to scrap best mortgages

The trend highlights just how far the real world of mortgage rates has decoupled from the Bank of England's official interest rate. Economists think base rates are falling but mortgage rates are almost universally on the rise.

The Co-op is scrapping a range of mortgages that regularly appear in the top 10 of the best buy tables, while Derbyshire building society is following suit and Lehman Brothers is closing its mortgage lending businesses Preferred and Southern Pacific Mortgage Ltd to new customers.

As increasing numbers of lenders pull their most competitive products, those remaining in the market have found themselves swamped with applications that they cannot possibly fulfil as they only have a limited amount of finance available.

Lenders are also concerned about whether they have the manpower to retain decent service levels for the new influx of customers.

Richard Morea, technical manager at London & Country Mortgages, said: "I've been in this business for 20 years and I've never seen anything like it. Companies are pulling products just days after launching them."

He added that he was having to advise some customers they may be better off avoiding lenders who were being overstretched as they may have to wait for several months to be processed.

He said the Co-op three-year base rate tracker, with a rate of 5.49% and the two-year fix at 5.49% were consistently in the top 10 best buy tables. Both are being pulled tomorrow. Its two-year base rate tracker was the market leader and is also being scrapped, he said.

Meanwhile Derbyshire scrapped its two-year fix at 5.29%, which was the market leader for 95% mortgages for internet and phone customers, although it will still be available from branches until tomorrow. It is also scrapping its 90% two-year fix at 4.99%, which was also market leader.

Sources at the building society said they had been "swamped" over the weekend. New prices will be announced on Friday.

Lehman Brothers is scrapping its Preferred and SPML products because of the difficulties financing them on the securitisation market. They are aimed at people with slightly adverse credit histories and the buy-to-let market. A spokesman refused to comment.

Existing customers will be moved onto the standard variable rate at the end of their fixed terms, which is likely to raise the prospect of a big increase in repayments.

NatWest parent Royal Bank of Scotland and Kent Reliance building society have become the first lending institutions to raise mortgage rates for existing customers.

First Direct, the internet banking offshoot of HSBC, became the first major mortgage lender to say it had closed its doors to new customers because it had done so much business since the start of the year.