Abbey defies ministers with loan rate rise

One of Britain’s largest mortgage providers on Tuesday pre-empted an expected cut in interest rates by announcing a rise in mortgage rates, defying ministers who want banks to lower the cost of borrowing.

Abbey, which provides one in four mortgages in the UK, will on Wednesday increase its two-and three-year tracker deals by up to 0.5 percentage points ahead of a rates decision by the Bank of England’s monetary policy committee on Thursday.

This means that homeowners taking out a tracker mortgage, which mirrors the movements of the Bank base rate, will not reap the benefits of an anticipated half-point cut on Thursday.

Lord Mandelson, business secretary, warned on Tuesday that consumers would be “surprised and disappointed” if the banks failed to pass on any cut in interest rates to their customers. But he conceded the government could not force banks to cut mortgage rates. Even banks such as Lloyds TSB – expected to be partly nationalised under a government recapitalisation scheme – insist ministers will not dictate lending policy.

“Abbey has absorbed the expected reduction in interest rates and this will increase their profit margin,” explained Melanie Bien, director of Savills Private Finance, the independent mortgage broker. “The government has said that rate cuts must be passed on, but it looks as though customers still won’t benefit.”

Abbey has blamed the move on competitors, claiming it has been forced to react to other lenders withdrawing products and increasing rates.

Despite government efforts to thaw credit markets with cash injections and cuts to the official interest rate, brokers are warning clients not to expect mortgages to ease in the near future.

David Hodgkinson, chief operating officer at HSBC, admitted that even if interest rates fell the bank would not necessarily pass the full effect on to customers, saying there would be “stickiness” on mortgage rates.

While fixed-rate mortgages have edged down over the past fortnight, lenders have raised tracker rates in order to protect their margins.

Vince Cable, Liberal Democrat Treasury spokesman, said: “Banks seem happy enough to increase the cost of lending when interest rates go up, yet always seem to be looking for new ways to avoid cutting the cost of borrowing when interest rates go down.”

Brokers say while Libor, the rate at which banks lend to one another, stays high, mortgages will not ease.

Abbey, which is owned by Spanish lender Santander, has also removed trackers available at 85 per cent loan to value, following similar moves by competitors to tighten lending criteria. Mortgage providers have been taking an increasingly cautious attitude towards customers by reducing the maximum LTV on offer.