Northern Rock raises its fixed mortgage rate

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by Lin Freestone

In defiance of the Government’s call for banks to cut rates and start lending again, Northern Rock has increased the costs of its most competitive home loans.

The state-owned lender, which was nationalised in February, has raised the cost of some of its new fixed-rate mortgages by up to 0.3 of a percentage point, which adds approximately £40 a month to the cost of a £150,000 loan. Northern Rock raised its lowest rate deal, fixed for one year, from 3.99% to 4.19%.

Reduced rates, introduced ten days ago, are believed to have resulted in a rush of new customers, using up Northern Rock’s allocation for cheap-rate deals. This has brought about the increase to 4.19% for the lowest rate deal.

Northern Rock has defended its move, stating that the increases are entirely justified because the deals were so cheap compared with the competition. The bank is anxious it does not breach competition constraints which prevent it from taking advantage of its Government guarantee.

The Bank of England has said that getting banks to lend to families and firms is the single most pressing challenge facing the country. Its governor, Mervyn King, has warned that nationalisation of the entire banking system would not be ruled out if lending does not pick up.