Mortgage prices will rise with lenders cashing in on rival’s turmoil, says HBOS chief

Recent weeks have already seen price increases in some types of mortgages, particularly tracker products, offered by Abbey, Alliance & Leicester and Nationwide as well as HBOS’s Halifax business. These loans are closely reliant on the short-term money markets, where lending rates have soared above the Bank of England’s base rate. Several senior banking figures have argued that this rise in the price of short-term money will pass within months.

But Mr Hornby said the readjustment in mortgages was likely to be more enduring: “I suspect that the mortgage market is about to undergo a fundamental shift. Over the past three years we’ve seen a major decline in mortgage margins … Now is the time for the clear leader in the mortgage market to deliver the right balance between volume, margin and credit risk.” The opportunity to make more profits from new mortgages is helped by the funding turmoil at HBOS’s competitor Northern Rock.

These trends are already starting to reverse and it is likely to continue … I believe ‘readjustment’ of pricing will present HBOS with real opportunities for value creation going forward.” Elsewhere, Northern Rock shares had another volatile day, hitting a record low of 112p in morning trading before recovering to close up 3.5p at 135.6p. Market speculation continues to focus on the likelihood of a takeover offer from the private equity groups Cerberus or JC Flowers.

Fearing an offer that would not cover their investment, a group of bondholders reportedly held a conference call yesterday to review their options. The cost of insuring Northern Rock debt rose sharply yesterday in the derivative markets, reflecting deepening fears.

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