UK lenders increase mortgage rates despite base rate cuts and government bailout

The cost of some UK mortgages are increasing despite the government bailout of some of the nation's banks and hopes that lending would increase.

In a second blow to property buyers it has also been revealed that last week's bank of England 0.5% drop in interest rates is not being passed on by most lenders.

Lloyd's TSB today raised its mainstream tracker mortgages by between 0.3% and 0.5%. Barclays' lending arm the Woolwich is increasing its lifetime and offset tracker rates by 0.2%. Cheltenham and Gloucester is also expected to announce an increase.

The lenders claim that their decision is based on recent rate increases by competitors. 'We are seeing unsustainable flows of customers to the Woolwich since changes by other lenders left us with some of the only competitively priced mortgages in the market,' said Andy Gray, head of mortgages at the Woolwich.

'Last week we immediately passed on the full Bank of England base rate cut of 0.5%, but as a result of changes elsewhere in the market we now need to control the flow of business by making some slight increases to the rates on our tracker mortgages,' he added.

Part of the problem is that wholesale money markets have failed to respond to last week's interest rate reduction. The key inter-bank lending rate, three-month Libor, upon which many variable rate mortgages are based, has remained stubbornly high despite the 0.5% fall in the official cost of borrowing.

It has edged down by four basis points, but still stands at 6.21%, well above the Bank of England base rate of 4.5%, as banks continued to be reluctant to lend to each other.

The changes came as figures showed that the gap between the cost of tracker mortgages and official interest rates has soared five-fold during the past year from 0.3% in October last year to 1.6% now.

The changes mean a two-year tracker from Lloyds TSB will now be 5.75%. The product is available up to 60% loan-to-value with a £995 fee. The interest rate on the two-year tracker available up to 75% loan-to-value (LTV) will be increased to 5.89%. This also carries a £995 fee.

Lenders have not yet passed on the full interest rate drop to borrowers. Nationwide has reduced its base mortgage rate by just 0.3%, while Abbey is cutting its equivalent by only 0.15%. Abbey also announced that it was reducing tracker rates for new customers borrowing up to 75% of their home's value by just 0.1%, effectively increasing the differential above base rate by 0.4%.

Nationalised bank Northern Rock is cutting its standard variable rate by only 0.15%, while HSBC is not reducing its standard variable rate at all. So far, only around a fifth of the 85 lenders with an SVR have announced plans to pass on the recent cut.