Tanya Powley, On Friday October 28, 2011, 9:47 am

European private banks have become less competitive on mortgage rates as the eurozone debt crisis continues to raise the cost of wholesale funding.

According to mortgage brokers, private banks including Handelsbanken and EFG have increased their mortgage rates by between 20 and 50 basis points in recent months.

“We did loads of million-plus mortgages with European-based banks before,” says Ian Gray of Largemortgageloans.com. “But the UK private banks are starting to come back to the fore now.”

Brokers note that many foreign private banks have become more conservative – and one even closed its UK arm this year. In June, BNP Paribas, the French bank, shut down its UK private banking business which had offered million-plus loans to wealthy borrowers.

Because most European private banks will typically price their loans on three-month Libor – the rate at which banks lend to each other – they have become a more expensive option. Three-month Libor has risen from around 0.83 per cent in August to 0.98 per cent this week.

“The private banks are afraid to lend on Bank of England base rate in case Libor spikes up again on the back of a major bank failure or any number of possible sovereign debt meltdown scenarios,” explains Gray. “They don’t want to be stuck on a 0.5 per cent base when their real cost of keeping the loan funded goes up.”