Base rate unchanged, mortgages still set to rise?

There are genuine fears that although base rates are unchanged that mortgage rates may still have to rise.

Mortgage rates are set to rise as crisis grips the worlds financial markets, home owners have been warned. Economists fear that high street lenders will be forced to pass on higher interest charges to their customers.

Any increase in rates would be a severe blow to Britain’s 17million borrowers, who have had to cope with five rises in the base rate over the past year. Two million borrowers about to come to the end of cheap, fixed rate, mortgage deals will be hit particularly hard.

The Nationwide Building Society estimates that a quarter of a million of these home owners will see their payments increase by £200 a month from next month.

Even though the Bank of England has left base rates untouched at 5.75 per cent, there is speculation that banks are preparing for higher mortgage rates. Banks borrow much of their money in the wholesale markets, where rates have soared over the past month. They pay the London Interbank Offered Rate and this has shot up from 6.04 per cent at the start of last month to 6.87 per cent.

This has meant that savers are happy as interest payments to them are rising, but borrowers may pay the cost in the form of higher mortgage repayments.

One respected former adviser at the Bank of England, said: “It is not in the nature of banks to offer savings rates higher than their mortgage rates. This is a precursor to higher mortgage costs.”

A director of a leading finance company said: “Mortgage rates will rise by probably half a per cent, because the cost to banks of borrowing money to lend to customers has increased by around one per cent. Lenders will be looking to recoup this increased cost from their customers.”

One expert, who works for a company that services £50billion of mortgages on behalf of more than 40 UK and Irish lenders, said: “The upshot is that mortgages won’t be readily as available and that lower quality borrowers – people with a patchy credit history or a poor financial track record – may find it more difficult to secure a loan. Lenders will be forced to price for risk again, as they used to in the past, so those borrowers, if they can find a loan, will end up paying more.”

The turmoil in the money markets has been sparked by huge numbers of people defaulting on their mortgages in America.

Mike Morgan, senior debt management specialist at Abacus, says:
“If you are nearing the end of a fixed rate deal and your mortgage is set to increase, a lot of people will unwittingly fall into the trap of more borrowings on overdrafts, cards and loans. As this will only lead to more pain and misery in the long run, it is vital that you take expert advice, preferably before any rises hit.”

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