Abbey hikes fixed mortgage rates again
Abbey is to increase rates on its fixed mortgage deals today - its second price hike in a period of just two weeks.
The lender will increase prices on its five-year fixed rate range by between 0.07% and 0.26% on 9 June. This follows it increasing rates on two and three-year fixed products on 29 May by between 0.15% and 0.56%.
Abbey is not the only lender to readjust the pricing on fixed rate deals. Bradford & Bingley has today increased rates by between 0.05% and 0.55%, while Alliance & Leicester, Nationwide, HSBC, the Post Office and Woolwich have all put their prices up in the past two weeks.
The Cheshire Building Society and Scarborough Building Society also increased the rates on their fixed mortgages.
Despite interest rates remaining frozen at 5% since April, when they fell by 0.25%, the cost of funding for fixed-rate mortgages (known as swap rates) has risen to over 6% - forcing lenders to put up prices.
David Hollingworth, mortgage specialist at London & Country mortgage brokers, says rate rises are “inevitable”.
“If swap rates don’t calm down then more lenders will have to take action and increase their pricing,” he adds.
Hollingworth believes there is also a strong possibility that tracker rate mortgages may increase in price as Libor - the short-term bank loans often used to price this type of variable mortgage - has also increased recently, though not by as much as swaps.
The increase in swap rates is a result of the Bank of England’s warning that tackling inflation comes before interest rate cuts.
“The market was expecting rate cuts, which is why swap rates and Libor fell slightly, but after the Bank of England effectively ruled out any radical rate cuts, sentiment deteriorated and rates have increased again,” explains Hollingworth.
Ironically, the interest rate freeze in June is likely to force more lenders to put up rates because it reinforces the central bank's policy to focus on tackling inflation. This means swap rates and Libor are unlikely to fall anytime soon.
An Abbey spokesman says: "The last two weeks have seen a volatile swaps market, which is still feeding through. It is likely that while the mortgage market remains volatile, we will continue to see frequent changes to rates."
Meanwhile, First Direct - which recently reopened its doors to new borrowers after temporarily leaving the market in April - has reduced the cost of its two-year fixed mortgage. The deal has seen its interest rate slashed from 5.76% to 5.59%, while its fees has reduced from £1,499 to £999.
It has also reduced the cost of its low-fee two-year fixed mortgage, from 6.2% to 5.89%.
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.