THE STATE'S biggest bank, AIB, has become the last mainstream lender to increase its mortgage rates in response to the continuing high cost of bank funding due to the global financial crisis.

The bank is raising tracker rates for new customers by up to 0.4 per cent and all but one of its fixed-rate mortgages. Most of its fixed rates are rising by 0.45-0.55 per cent, though the two-year fixed rate is increasing by 0.6 per cent.

This will now cost an extra €112 a month on a €300,000 30-year loan over the two-year fixed term.

AIB has held a competitive edge over its rivals by maintaining its mortgage interest rates as other lenders were forced to raise theirs in line with the increases in wholesale money costs.

AIB head of credit products Marian McCarville said: "Having held off for as long as possible as the market moves up, we must now increase some of our mortgage rates to reflect the significantly increased cost of funds."

She said the bank would still provide mortgages of up to 92 per cent of the value of a property and would not restrict the availability of new mortgages. She said this was "a time of significant change" in the mortgage market.

AIB has left its standard variable rate unchanged, so existing borrowers have not been affected by the increases, which come into effect on Monday.

Existing tracker customers are also unaffected.

The bank is no longer offering its 4.6 per cent tracker-rate mortgage - one of the lowest in the market - on mortgages where the loan is equal to or less than 50 per cent of the property's value.

The rate on this loan-to-value tracker product is increasing to 5 per cent.

The announcement by the European Central Bank that it may raise its rates next month led to a sudden jump in wholesale money costs. The three-month inter-bank rate jumped 0.1 per cent to 4.97 per cent, its highest level since December 2000, the day after the announcement, and has remained near that level.

The cost of two-year and three-year funding jumped more than 0.5 per cent last week, which has led to substantial increases on two- and three-year fixed mortgages.

In response, IIB Bank, the fifth largest mortgage lender in the market, withdrew its two-year fixed-rate mortgage late last week and raised other fixed rates.

AIB ended its one-year discount on tracker mortgages for new customers in April, but left its standard tracker rate unchanged, increasing the pressure on its rivals in the mortgage market.

Although the State's largest bank, AIB is the fourth largest mortgage lender after Permanent TSB, Ulster Bank Group (including its subsidiary, First Active) and Bank of Ireland.

AIB is regarded as "underweight" in the mortgage market, as it accounts for a smaller percentage of the group's profits compared with Permanent TSB and Bank of Ireland.