Merger expected to prompt rise in UK mortgage rates

Mortgage rates in Britiain could begin rising again following another significant jump in the cost of wholesale funding today.

The global financial turmoil has caused one of the key inter-bank lending rates, three month Libor, to increase to 5.98%, up from 5.7% at the end of last week.

The rise will not only affect the rates of tracker mortgages, but it also indicates a renewed reluctance among banks to lend to each other, suggesting the recent improvement in the mortgage market will be short-lived.

Ray Boulger, senior technical manager at John Charcol, said: "It is likely that we will see some of the keener trackers being repriced."

He added that as UK interest rates fell over the coming year, the spread lenders had between the cost of their funds and the rates they charged consumers was likely to widen.

He said: "With the reduction in profits, lenders need to rebuild their balance sheets, and the only way they can do that in the current market is to widen their margins."

The recent trend among lenders to cut their fixed rate deals is also likely to come to an end, despite a recent fall in swap rates, upon which the deals are based.

Eamonn Rice, chief executive of mform.co.uk, said he expected lenders to begin raising their rates again in response to the "wild swings" on the money markets.

He said rates on best buy mortgages had fallen by an average of nearly 0.5% during the past six weeks, but this trend is now likely to be over.

Mr Rice said: "Just when it looked like there was light at the end of the tunnel for the mortgage market we are now heading back to a period of rising rates."

Lloyds TSB's takeover of Halifax Bank of Scotland is also expected to reduce competition in the mortgage market over the long term.

Halifax is understood to be planning to pull some of its mortgage products at the end of this week, and it is not expected to relaunch deals to replace them until the end of next week.

Andrew Hagger, of Moneynet.co.uk, said: "It is a concern that consumers will be faced with a far more limited choice of products on the back of this merger and the previously announced Abbey takeover of Alliance & Leicester.

"No matter what the terms of the merger and the size of the new beast, we are waving goodbye to an element of competition in the personal finance market."

It is too early to say which HBOS brands Lloyds TSB will keep, but commentators speculated that the Birmingham Midshires brand could be vulnerable.

Birmingham Midshires operates in a number of areas of specialist lending, including sub-prime and self-certification, and there are concerns that Lloyds will not want to remain in these sectors.

Louise Coming, head of mortgages at moneysupermarket.com, said: "Lloyds have always run a very conservative ship and I have no doubt the merged operation will have a diminished appetite for higher risk specialist lending.

"This could leave borrowers without a squeaky clean credit rating or a large deposit without a hope of being accepted by the new super bank.

"Therefore, the slightly riskier part of the housing market populated by first-time buyers and sub-prime borrowers is set to stagnate even further, which won't be good for the market as a whole."

She added that consumer trust in the mortgage industry was "extremely fragile" however, and the takeover could go some way to restoring it.