BORROWERS have been warned that the days of cheap two-year mortgages may be numbered, as it emerged that bewildered consumers are defaulting on to their lender’s expensive standard-variable rates (SVRs) rather than navigate the mortgage maze.

Nationwide, Britain’s biggest building society, last week raised rates on its two-year trackers by so much that some are now higher than its SVR.

Its two-year tracker for new borrowers with a 5% deposit went up from 6.43% to 7%, which is above its SVR at just 6.74%. The building society also lifted two-year fixed rates by 0.2 percentage points.

Cheltenham & Gloucester, the mortgage arm of Lloyds TSB, also raised some two-year trackers by up to 0.35 points, takings its two-year deal to 6.99% – just 0.26% beneath its standard rate of 7.25%. The lender also cut the maximum amount it will lend to 80% of the value of the property.

Meanwhile, Standard Life scrapped its entire range of cheap, two-year deals, a move that could push borrowers towards its SVR, which is 7.21%. It said it had no immediate plans to reintroduce the deals.

Ray Boulger: “This is extremely worrying. It seems we are moving toward a situation we had in the 1980s when consumers had no choice but the SVR.

“The danger with going onto the lender’s variable rate is that with more people on the SVR, the more likely banks will fail to adjust their variable rate in line with Bank rate cuts. I would urge borrowers to act as quickly as possible to move off this rate.”

He said that some lenders are still prepared to offer decent rates. For example, HSBC, which owns First Direct, has said it hopes to use the credit crunch to increase its market share as rivals pull back. It is offering a good two-year fix at 4.95% – although this has been raised from 4.75% last week – and First Direct also has a good five-year fix at 5.29%.

Nationwide’s move came as the building society released figures showing house prices had fallen by 0.6% in March – the fifth consecutive fall. The annual growth rate is down to just 1.1%, its lowest since March 1996.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: “Lenders are continuing to respond to the worsening conditions in the money markets by raising the cost of mortgage loans and tightening up on lending criteria.”

More than 10,000 products have been pulled since the credit crunch struck last summer, according to data firm Moneyfacts. Borrowers with small deposits or requiring high income multiples have been hit most.

Brokers said thousands of borrowers are opting to roll on to the SVR at the end of their deals because there is so much confusion about the direction of interest rates.

However, sticking with the SVR could cost hundreds of pounds extra in interest repayments, even if you are on it for only a short period while things become clearer.

The average SVR is 0.09 percentage points higher than when Bank rate was last at 5.25%. Following the Bank of England’s February rate cut, 17 lenders chose not to pass on the full quarter-point decrease, including Standard Life and Norwich & Peter-borough, Moneyfacts said.

According to the Council of Mortgage Lenders, 20% of borrowers with outstanding mortgages are paying their lenders’ SVR or are on discount rates that are linked to it, amounting to loans worth more than £237 billion. By charging almost 0.1 points more on their SVRs than a year ago, lenders therefore stand to make an extra £231 million.

Simon Tyler of brokers Chase de Vere Mortgage Management said: “Borrowers may be tempted to go on to their lender’s SVR in the hope that better deals will come later in the year but this is not advisable. You will almost certainly pay more in the long run if you spend even a couple of months on a lender’s SVR.”

Repayments on a £200,000 mortgage at an SVR of 7.24% would cost £375 a month more than a market-leading two-year fix from Derbyshire building society at 4.99%.

James and Lucie Roberts are typical of the borrowers who have been stuck on their lender’s SVR. They have been paying Northern Rock’s rate of 7.59% since their two-year fix expired this year.

They are switching their £182,000 mortgage to a tracker from the Coop at 5.74% but estimate they will have paid an extra £697 while they waited to remortgage.

James said: “We would have remortgaged earlier but we were trying to decide whether to move or to stay in our current property as we are about to have our first child. The decision was particularly difficult as the property and mortgage market is so unstable at the moment.”

David Hollingworth of broker L&C said: “It’s a question we are getting asked a lot by borrowers: Should I hang on because rates might go down? But as we saw with Nationwide this week rates are only going up.”

Fixed rate deals are markedly cheaper than trackers at the moment but this could change.

Melanie Bien of broker Savills Private Finance said: “Even if the Bank rate is cut twice, trackers could still work out more expensive. It could be a year at least before trackers are worth while again.”

If you still can’t decide which mortgage to go for, you take out a tracker with no penalties so that you can switch into a better deal at a later date.

Bien recommends First Direct’s lifetime tracker at 5.59% with a fee of £399, which allows you to switch without penalty.

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POLLY SHARMA, 43, of Wolverhampton, has been paying West Bromwich’s standard-variable rate of 7.34% on her £133,000 mortgage since her five-year, fixed-rate mortgage with the lender expired this year.

The increase in her interest rate on her mortgage from 4.99% previously has added £194 to her monthly repayments, which have leapt from £776 to £969.

While she is looking around for a new mortgage, she has not yet settled a deal.

Polly, who has three children, said that she has decided to stay on the SVR as she is going through a divorce and is unsure whether to move or remortgage.

Turmoil in the mortgage market has made the decision even more difficult.