Millions set to pay higher mortgage rate

Tim Wallace
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MORTGAGE repayments are set to rise across the board, with millions of borrowers expected to pay more each month.

Over one million Halifax and NatWest customers have already been hit with rate rises, while some new customers to Santander will also see repayments go up.

Those banks have blamed higher funding costs on wholesale and deposit markets, so even though the Bank of England base rate is still at a record low of 0.5 per cent – and has been for three years – it is getting more expensive for banks to fund mortgage lending.

The crisis in the Eurozone is in part to blame, as well as rising costs of capital as banks are forced to hold larger buffers against risky lending.“These are market forces at play – they will affect pretty much every bank,” said one bank source.

Halifax illustrated the squeeze banks are facing, explaining “Throughout 2007, prior to tightening economic conditions, the average savings rate was 1.18 per cent lower than the Bank of England base rate. Since 2008 the average savings rate is 1.27 per cent higher than the Bank of England base rate.”

“This demonstrates the increased cost that banks must pay to attract retail deposits. Longer term funding costs are particularly high.”

Santander also stressed the cost of attractive longer-term deposits.“Our best instant access savings account pays 3.1 per cent, while our ISA, for longer term savings, pays 4.1 per cent – when we might charge 3.2 per cent for a mortgage, that is not a high margin from which we can pay salaries and other costs,” said a spokesman.

Across the sector, banks have seen a swathe of credit ratings cuts, pushing up the perceived risk of lending to the institutions, raising costs further.

Lloyds-owned Halifax is raising its standard variable rate from 3.5 per cent to 3.99 from May, hitting 850,000 customers and increasing average repayments by around £16.40 per month.

NatWest, part of RBS, is adding 0.25 per cent to repayments on two of its products, raising the rate to four per cent.