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Fury as interest rates are cut but mortgages still go up
Last updated at 17:22pm on 11.04.08Mortgage lenders were yesterday accused of cashing in on the credit crunch by raising the cost of home loans hours before the Bank of England cut interest rates.
In an attempt to boost the ailing economy, the Bank yesterday reduced the base rate from 5.25 per cent to 5 per cent.
But the move came after two of the biggest lenders revealed plans to move in the opposite direction and raise their mortgage rates today.
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Cut: The move is unlikely to provide much relief for homeowners
One of these is Alliance & Leicester, which will have increased its rates twice in less than a week.
The firm raised its fixed-rate mortgage deals on Tuesday then just 72 hours later today.
On Monday, customers could take out a two-year fixed rate mortgage of 4.99 per cent. Today, the rate will be 5.74 per cent.
This means a customer who takes out the average loan of £158,100 with the bank today will need to find about £850 more in repayments this year than a customer who took one out on Monday.
The country's biggest building society, Nationwide, will today also increase its prices for a sixth time since the beginning of the year.
With rates soaring despite the Bank's base rate falling, homeowners are paying the price for the credit crunch.
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Nicholas Leeming, a director of the website Propertyfinder.com, said: "Banks are nervous and it is mortgage borrowers who are suffering. Lenders are withdrawing from offering mortgages, and the deals which are on offer are extortionate."
In a sign of the severity of the crisis, mortgages known as "trackers", which are supposed to follow interest rates, are now more expensive than they were when the base rate was 5.75 per cent.
A Daily Mail investigation this week revealed how banks have already been short-changing customers by failing to pass on the benefits of interest rate cuts.
They are using the lending squeeze to make money by raising mortgage rates.
With only 22 minutes' notice, Skipton Building Society axed one of its buytolet mortgages yesterday, and introduced a rate which is 0.54 percentage points higher.
Banks and building societies insist they are having to pay a rate of up to 8 per cent to borrow money and have no choice but pass on the cost to their customers.
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The Bank of England has slashed interest rates for the third time since December
But experts warned this means savings rates will be cut savagely, too.
Rachel Thrussell, head of savings at the financial information firm Moneyfacts, said: "Big banks tend to cut rates on some of their accounts by more than base rate. I expect the same this time round."
The Liberal Democrats warned that the Bank of England may have lost control of mortgage rates. Treasury spokesman Vince Cable said: "This will make little, if any, difference for the vast majority of people.
"There is currently a fundamental disconnect between the Bank of England's interest rate and the rates high street banks are willing to offer customers."
In an unusually robust statement, the Council of Mortgage Lenders described the mortgage market as "dysfunctional".
Michael Coogan, its director general, added: "The Bank's base rate is not in itself a good guide to the cost or availability of funds to lenders."
Around 75 per cent of the mortgage deals available last summer have since disappeared.
Property experts yesterday called for further interest rate cuts to prevent a property meltdown. Some predicted rates will drop to 3.5 per cent next year.
Roger Bootle, economic adviser to the accountants Deloitte, said: "The danger is a vicious circle of falling employment, lower house prices and weaker consumer spending."
Some experts fear house prices could fall by 20 per cent over the next two years. Halifax's monthly survey showed prices slumped 2.5 per cent in March, the biggest fall since 1992.
Last night George Soros, one of the world's most powerful financiers, blamed the Bank's governor, Mervyn King, for much of the crisis.
Speaking on Channel 4 News, he said the rates cuts were too little, too late, and warned that house prices are "unsustainable" and had gone up "far too much".
Some, but not all, of the big mortgage lenders passed yesterday's base rate cut on to their borrowers with a lower standard variable rate.
But few homeowners will benefit, with only about 20 per cent of all borrowers on a standard variable deal.
Reader views (14)
Stop griping! Interest rates are still cheap. You cant buy a cheap gents suit with a charge card that equals the rate banks are lending millions on....
- Barry Harrison, Lichield England
The banks are tired of being politically manipulated. What is happening now in reaction to the BofE rate cut is a sign of things to come, namely, the banks are not going to be led around by the nose any more. The BofE prime rate is a tool that no longer works. The Brown Government had better come up with some other ideas if it wants to stop the house bubble from bursting. Good for the banks.
- Phil Jones, London UK
Last I was aware the banks were not a charity for the common person. People seem to forget that rates were around the 7% mark just 8 years ago and if it weren't for 911 probably would still be about the same. If people are stupid enough to borrow far more than they are able to pay back that is their problem and rates are still in my opinion at a reasonable rate for the amount being borrowed and the time the borrowing is taken over. Banks have to cover their risk as well and in these times that risk is high. They are doing nothing wrong.
- Claire, London, UK
Oh dear! All this fuss over a trivial 0.25 or 0.5%. Why do I say trivial? I remember taking out a mortgage with a 10% deposit required. Within a 18 months the rate had gone from 8.5% to 15% and the value had gone down by 25%. It's only just beginning. There was no way the over inflated housing market could be sustained!
- Michael, London
The BOE's job is not to bail out the housing market but to contain inflation. So far, it is doing a terrible job at it. The housing market will crash by 20% over the next 2 years regardless of how much "fury" there is among greedy home sellers and so called "property experts". There won't be much of an impact for savers since banks are desperate to attract cash in to offset their bad debts.
- John, London, UK
I find it odd that people are saying the banks should pass on the interest rate cut. The reason for the credit crunch is that the banks lent at uneconomic levels based on the the risk of the people they lent to. They need to lend at a rate which reflects this risk and that means that until they are relatively certain of the risks of the people as well as the economic risks, a direct link to base rates is unlikely to be re-established. In short they will lend at whatever rate they choose to stay in business - much as people selling tins of beans change the price when the cost of beans is uncertain.
- Andy, Surrey
To be fair to the banks, a fixed rate mortgage at 1% over the base rate would seem reasonable as the market could just as easily rocket up 1% in the next 2 years. A normal or tracker mortgage follows the BOE base rate and as such will go up and down, so fixing at 1.3% above inflation means the banks are simply being greedy and trying to turn a huge profit so they can keep their bonuses and thus their Chelsea houses can have new extensions. My advice would be to vote with your feet, move your mortgage elsewhere if you can.
- Walter Banker, London
It's ridiculous. We're left completely ripped off. I've been using comparison sites and more specific mortgage sites like mortgages.co.uk and although its not their fault, mortgages are ridiculously expensive. I m on a fixed rate, and desperately don't want my interest rate to increase almost double, but I may not have a choice.
- Peter Lindsay, SW9
James n1 says it all....
- D, London
The banks are using this to recover the losses from the amateurish investments that they have made in the past. Like the current government they couldn't give a toss what happens to the common man as long as their own nests are well lined.
- Casper Slides, France
Sounds like these private institutions are again free to profit, without government intervention. Another Northern Rock where we nationalise a private bank when it goes wrong but when all goes right the private banks can continue... typically Nu Labor incompetence.
- Jacqueline, Hampstead, London
What a wonderful story, you've made my day.
- Tony, Toronto,Canada
As a buy to let speculator since 1992, I hope we are seeing a a downturn. It was in that year I was able to snap up some real bargains on the back of people not able to pay their mortgages. The banks loved people like me with money to invest in insolvent properties. Two of which the the previous owners left most of the furniture for some reason. FYI If it wasn't for the students and Poles paying my mortgages I might have to get a job for the first time in 20 years. A worrying thought for a 52 year old.
- James, n1
The banks should be made to pass this on - surely the government isn't doing this just to benefit the huge profits the banks already have.
This should be unlawful and the companies which withhold the cut should be prosecuted.
- Jo Boone, Canvey Island
