Hikes in home-loan fees fuel price rises

One of the factors fuelling the UK's rocketing inflation is banks stinging customers with higher mortgage and banking fees, it emerged today.

Although borrowing rates remain cheap, lenders have winched up stealth charges such as arrangement fees on home loans. And that's pushing up inflation.

The Office for National Statistics said financial services costs, including mortgage charges, had risen 1.1% between June and July, contributing almost 0.1% to the rise in the Consumer Prices Index. In another blow to consumers, that rising inflation is making it near-impossible to retain the value of cash in a savings accounts. Only five on the market now offer an inflation-beating return.

Last month, the average mortgage arrangement fee at Britain's banks hit £1002, up from £904 in June, according to comparison site Moneyfacts. ING Direct raised the fee on its two-year variable tracker by £500 to £1445 in July. First Direct increased the arrangement fee on its two-year tracker to £1499 from £999.

Overdrafts are also becoming more expensive. The average authorised rate hit 15.6% in July, up from 14.1% last summer. The banks, including the bailed-out Royal Bank of Scotland and Lloyds Banking Group, appear to be squeezing more cash out of customers while keeping their headline rates advert-friendly low.

Experts said banks might be using their extra revenues to pay compensation for miss-selling payment protection insurance. "Banks are enticing customers with low rates and charging higher fees to make it profitable," said Kevin Bray, banking analyst at Defaqto.