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Allied Irish raises home loan rates in bid to stem losses

DUBLIN, Oct 3 (Reuters) - Allied Irish Banks will increase its mortgage rates by 0.5 percentage points for the second time in two months in November in a bid to stem big losses, putting pressure on struggling home owners in the process.

AIB will hike its variable mortgage rate to 4 percent, which it said on Wednesday would still remain the lowest in the Irish market. Almost 13 percent of the bank's mortgage customers were in arrears for more than 90 days at the end of June.

Faced with high funding costs, Irish banks are cutting savings rates and increasing mortgage rates and Bank of Ireland , the only bank to avoid a full state rescue, will increase its mortgage rates this month.

"AIB does not have an option of continuing to provide mortgages on a loss-making basis at pricing materially below our market competitors, as is currently the case," AIB's chief executive David Duffy said in a statement.

"To do so would only see further erosion of the capital provided to the bank by the state."

The bank, which set the state back 20 billion euros in getting the biggest bail-out of any lender still open, is closing nearly a quarter of its branches, axing 2,500 jobs - almost 20 percent of its workforce - and cutting salaries by up to 15 percent in its effort to return to profitability by 2014.

(Reporting by Padraic Halpin; Editing by Greg Mahlich)

((padraic.halpin@thomsonreuters.com)(+353 1 500 1529)(Reuters Messaging: padraic.halpin.thomsonreuters.com@reuters.net))