It's the limit, lenders

High street mortgage lenders have changed the interest rates on their most heavily discounted products in the last few weeks, but without the usual fanfare of publicity.


The reason? Interest rates have been moving up rather than down in most cases, which is not something most lenders want to shout about.


The top three lenders - Abbey National, the Nationwide and Halifax - have all put some or all of their fixed, capped or discounted variable rates up, bringing to an end six months of continually falling mortgage rates.


Mortgage customers have become accustomed to base rate cuts since last September when they stood at 7.5 per cent. Today the base rate is 5.5 per cent.


House buyers have also enjoyed intense competition in the market, which has driven mortgage rates down even further. There are more than 1,000 different mortgages on offer from banks and building societies and some of them undercut the base rate by as much as 4 per cent.


But the message from the top three lenders seems to be that the frenzy of discounting has reached its limit, especially on discounts lasting longer than two years.


Two of them - Abbey National and Nationwide - blame the cost of borrowing on the international money markets where interest rates are expected to go up in the longer term. Over the past three weeks rises in international rates have shoved up the cost of providing a five-year fixed-rate mortgage at the Nationwide by 0.3 per cent to 5.89 per cent. A home owner with a ?60,000 loan will find the fix is ?17 more expensive per month.


The Hinckley & Rugby building society has pushed its five-year fix up from 5.25 per cent to 6.49 per cent in recent weeks.


David Nicholson, Halifax's head of mortgage marketing, says the decision to raise rates on the bank's three-to-five year discounted variable rates by an average 0.2 per cent was more about changing the mix of its business than the expense of borrowing.


''Last year, fixed and capped-rate mortgages accounted for seven out of ten sales. Now the demand for discounted variable mortgages is increasing to the point where it is now about 50:50 and you are seeing the market adjust to the different take-up. In effect it is saying that there are enough customers on highly subsidised discount rates and it wants to make its capped and fixed rates more attractive.''


Patrick Bunton, an adviser with mortgage broker London & Country, says that while UK rates might go down over the next year, they might rise again if the economy picks up. Then again, if the UK rates become tied to the euro zone interest rate of 3 per cent in the run up to a possible entry to the European Monetary Union, rates may go down again dramatically.


Experts who believe rates have gone as low as they can seem more plausible. As Mr Bunton points out, mortgage rates on the Continent are comparable with our own, even though their base rate is much lower.


Any cuts in rates in the near future are more likely to be absorbed by the lenders rather than passed on to customers, if you follow this argument. The result will be that the discounts on variable rate mortgages will shrink, leaving customers paying the same or higher mortgage rates.


The next year looks much like the situation now. Most of the biggest discounts offered by lenders are targeted at customers who are prepared to put down a large deposit or accept a long lock-in to the lenders standard variable rate after the discount offer period has run out.


Lenders offering mortgages without huge penalties for switching early or long lock-ins have, by-and-large, kept their three to five-year fixed rates above 5 per cent. Discounts on standard variable rates are in the region of 1-1.5 per cent on the standard variable rate and it is these discounts that could be squeezed further if headline rates fall.


As John Charcol technical director Ray Boulger says, home buyers who accept any discount offer with a long lock-in could end up regretting it. ''To tie yourself into a long fix now might not be sensible - you might want to take a fix in a couple of years time when rates might begin to rise.''