Tracker mortgage rates increased

Two mortgage lenders have hiked their tracker rates as the cost of inter-bank borrowing again failed to reflect the recent cut in interest rates.

Lloyds TSB said it was raising the cost of its mainstream trackers by between 0.3% and 0.5%, while Barclays' lending arm the Woolwich is increasing its lifetime and offset tracker rates by 0.2%.

The Woolwich reduced the cost of its tracker deals by 0.5% following last week's Bank of England base rate cut.

But Lloyds, which also lends under the Cheltenham & Gloucester brand, failed to do this, meaning the differential between the cost of its deals and the base rate has risen by between 0.8% and 1%.

Both groups blamed their decision on recent rate increases made by competitors.

Andy Gray, head of mortgages at the Woolwich, said: "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.

"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."

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.

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