Mortgage Rates On Way Up Again

As mortgage providers start to raise their rates again, there was a warning from the governor of the Bank of England Mervyn King that the cost of borrowing would probably rise, whichever way the Bank moved its official base rate. It appeared to be a surrender to the crisis afflicting the world’s financial markets – certainly in terms of mortgage rates.

The impact of the US sub-prime crisis, losing billions of dollars as it has, is now reaching the end consumer, as banks try to cover losses and uncertainties by making more money from borrowers.

Mr King said the banks had undertaken ‘risk and reckless lending’, but said it was too early to assess the impact the credit crunch crisis would eventually have on the wider economy. His predictions of higher mortgages were brought into immediate focus as lenders such as Abbey and the Bank of Scotland increased some of their rates. The country’s largest mortgage lender, the Halifax, is expected to join the others by raising its rates on its new trackers by between 0.1% and 0.2% in the next day or two.

Mortgages are going up just as house prices are coming down – at least according to one survey. Data from the Royal Institution of Chartered Surveyors shows that demand slowed down significantly in August, causing house prices across the country to fall for the first time since 2005.

Householders would have hoped that the worst mortgage news was over after the Bank held its base rate at 5.75% for the second month running, and the speculation is now that interest rates may have peaked. The irony is that the same reason that is holding back interest rates is now causing mortgage lenders to put their rates up – and the reason is the squeeze on credit and financial market turmoil.

Mr King said that the Bank could lower its rate from 5.75% to try and ease the pain for families with mortgages, but there was no guarantee that it would do so. Although historically the level of the Bank’s base rate has been the main factor governing mortgage rates, this appears to be the case no longer.

Chancellor of the Exchequer Alistair Darling joined in the criticism of reckless lending, saying that both lenders and borrowers need to ‘think long and hard about the risks involved with the amounts under considerations, and Mr Darling urged a return to ‘good old-fashioned banking’, adding, ‘in crude terms they need to know who they’re lending to, how much they’re lending and what the risk is. Borrowers need to ask themselves “can I repay this?”.’ Mr Darling did not, however, in any way suggest that the Government would be bringing in tighter regulation.

The warning from Mr King came in a report to be passed to Parliament’s Treasury Select Committee later in September, taking the unusual decision to make its contents public early because of the current crisis.
The report said: “The new element introduced by the recent turmoil is that effective borrowing rates facing households and companies will rise somewhat. It is too soon to tell how persistent and how large any change in credit conditions for household and corporate borrowers will prove to be.”

The cost of the average standard variable rate mortgage has recently gone up to its highest level for nine years, at 7.69% after the Bank's interest rises.

A £150,000 loan has seen re-payments jump by £100 a month to £1,133 over the past 12 month, according to Halifax figures. The cost of borrowing money between banks is also at its highest for almost nine years. However, Mr King said he had no intention of bailing out irresponsible bankers. That, he said, would only encourage them to engage in further speculation and risk-taking. He did, however, vow to “protect the public from the consequences of the turmoil by continuing to maintain economic stability” by setting interest rates to meet the 2% inflation target.

Latest forecasts are for the Bank’s next move to be to cut the base rate. Time will tell.

Tom Smith
18th September 2007

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