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Abbey hikes cost of tracker mortgages two days before Bank of England is expected to cut interest rates

By SEAN POULTER
Last updated at 12:22 AM on 05th November 2008

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Britain's second biggest mortgage lender raised its rate by half a point yesterday, just 48 hours before an expected 1 per cent cut in the Bank of England rate.

The cynical move by the Abbey - killing off the benefit of the imminent cut - came after Business Secretary Lord Mandelson admitted he is powerless to force banks to bring down the cost of borrowing despite a £37billion nationalisation bail-out.

It is part of a wider drive by lenders to increase their profit margins on home loans without passing on the benefits to hard-pressed customers. The developments, seen as a slap in the face to the Government and the public, triggered condemnation of both the Government and the banks.

Moving up: Abbey is increasing its variable mortgage rates - two days before interest rates are expected to be cut

Gordon Brown and his ministers, despite tough talk in recent weeks, stand accused of going soft on the banks and failing to win a fair deal for customers in return for billions in taxpayers' cash.

The Bank of England's Monetary Policy Committee is under pressure to slash the base rate by a full point tomorrow, bringing it down to 3.5 per cent. This is considered vital by MPs, business and retailers to tame the slide into recession.

 

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Taxpayers have ploughed in the £37billion to struggling Lloyds TSB, Halifax owner HBOS and Royal Bank of Scotland to save them from going under.

Lord Mandelson: Admitted government could not force banks to cut rates

And hundreds of billions of pounds in loans have been made available to banks across the high street to pump cash into the financial system.

However, it is now clear that the banks have snubbed the Government and the public by putting their profits ahead of a fairer deal for customers.

Earlier this week, the chief operating officer of HSBC indicated that Britain's biggest and richest bank would not pass on the full benefit of base rate cuts.

This policy of putting profits before customers was confirmed when Abbey put up the cost of its base rate tracker rate mortgages.

A new two-year tracker will start at a rate of 6.29 per cent, while the figure for a new three-year deal will be 6.19 per cent.

The bank is also withdrawing tracker home loans from anyone who does not have a deposit or equity in their home of at least 25 per cent of the value.

This will block remortgage applications from buyers who have seen their house price savaged in the past year.

The development came days after Nationwide increased the cost of its new tracker rate mortgages by 0.4 of a point and Halifax increased its fiveyear trackers by up to half a point.

Some 42 of the 96 lenders which offer standard variable rate (SVR) mortgages failed to cut home loan repayments following October's half point cut in the base rate. Many of the others did not pass on the full reduction.

Lord Mandelson insisted yesterday that restoring normal banking and credit lines had been one of the conditions of the Government's bail-out.

However, he acknowledged that the Government could not force the high street banks to cut rates.

Instead, he offered the observation that people would be 'surprised and disappointed' if the banks failed to act.

He told the BBC Radio 4 Today programme: 'If it appeared that the banks were standing in the way between what the Government is doing and how the public wants to benefit, I think many banking customers are going to be asking some difficult questions of the banks.'

'Soft': Vince Cable attacked the government

One mortgage broker told the finance website Moneymarketing that the increases in the cost of tracker deals by Abbey and others was ' disgusting'.

He said: 'These lenders are supposed to be helping people get hold of mortgages right now, but this is anything but.' Liberal Democrat Treasury spokesman Vince Cable accused the Government of going soft on the banks.

'The Government's approach of handing over large sums of taxpayers' money to the banks while continuing an arm's length relationship is clearly being abused,' he said.

A spokesman for Abbey, which is owned by Spain's Banco Santander, said: 'Recent moves by competitors, increasing tracker rates and withdrawing products, have resulted in today's decision.'

It said its mortgage deals were competitive.

The banks claim that the higher cost of borrowing reflects changes to the interbank lending rate - the LIBOR - rather than reductions in the Bank of England base rate.

In fact the LIBOR rates for borrowing money between two and five years have fallen over the past month.

• The Financial Services Authority yesterday announced a new watchdog to police the banks.