The UK’s biggest lender is scrapping its ultra-low standard variable rate mortgage for new borrowers.

Lloyds TSB and Cheltenham & Gloucester currently have a standard variable rate (SVR) of just 2.5 per cent when customers come to the end of their existing mortgage deal - one of the lowest available.

But the group announced that from June 1, customers taking out a new mortgage would no longer revert to the SVR when their deal came to an end, but would instead be put on to its new homeowner variable rate, which is currently 3.99 per cent.

It said the new rate reflected the “ongoing substantially higher cost of funding”.

The move is similar to one introduced by Nationwide in April last year, when it said new mortgage customers would revert to its standard mortgage rate of base rate plus 3.49 per cent, when their deal ended, rather than its base mortgage rate of 2.99 per cent.

The mutual revealed in its annual result yesterday that customers on its base mortgage rate were costing it more than £450 million a year compared with the rates being charged by its competitors.

In a normal mortgage market homeowners typically stay on their lenders’ SVR only for as long as it takes them to remortgage to a better deal.

But plunging interest rates, combined with the tighter credit scoring criteria introduced by lenders following the credit crunch, have left many borrowers better off staying put.

Lloyds declined to say how many Lloyds TSB and C&G borrowers were currently on its SVR, but all mortgage customers with the brands will either be on the rate or have access to it when their deal expire.

The group stressed that the move would not affect any other of its mortgage brands, while existing customers would only revert to the new rate if they transferred to a new deal or increased the amount they borrowed, and then it would only be the new borrowing that was subject to the higher interest rate once their mortgage deal ended.

It added that at 3.99 per cent the new rate was below the average charged by the major lenders, although it is higher than the 3.5 per cent that borrowers at Halifax, part of the same group, revert to.

SVRs tend to follow movements in the Bank of England base rate, although they do not track it.

However, Lloyds TSB and C&G had pledged that their SVR would never be more than two per cent above the base rate, meaning they had no choice but to pass on all the cuts, even when interest rates had fell to a record low of 0.5 per cent.

Stephen Noakes, commercial director of mortgages at Lloyds Banking Group, said: “The new rate balances the needs of our customers with the commercial needs of the business.

“In the light of market conditions, particularly ongoing higher funding costs, we have introduced this new rate for new mortgages only.

“It means that we can continue to offer a wide range of competitive and innovative products.”

He added that no borrower would revert to the rate until June 2012 at the earliest.

The difference between the SVR of 2.5 per cent and the homeowner variable rate of 3.99 per cent would cost someone with a typical £100,000 mortgage around £80 a month.