Mortgages Look Set To Rise

Experts are predicting that mortgage rates are going to go up again as a direct result of the recent turbulence that has overcome global financial markets.

Another increase in mortgage rates would be yet another blow to the UK’s 17 million mortgage customers, who have seen the Bank of England’s base rate move from 4.5% last August to its current rate of 5.75%. Although the Bank left the rate unchanged last week experts fear that the stock market upheaval of the past month will cause nervous banks who are under pressure from the chaos to push up mortgage rates again.

Some evidence is already there. In the last week five banks have put their savings rates up to around 6.7%. On the face of it this may seem like good news – especially for savers – but it is not like the banks to raise their savings rates without putting up borrowing rates. Therefore, it seems like the precursor to bad news for mortgage borrowers.

If mortgage rates are increased it will be particularly painful for two million home owners who are still on low fixed rates taken out two years ago when interest rates were low. They are going to be hit by a sharp increase in their monthly payments when their deals end over the next few months. Another rate rise would be a harsh blow. Nationwide is anticipating that 250,000- of its mortgage customers will their monthly repayments increase by £200 a month from October.

The money banks use to fund mortgages is borrowed on wholesale markets where the London Interbank Offered Rate (Libor) has gone up from 6.04% to 6.87% in the last few days.

The turmoil in the markets is bound to affect consumers eventually. As the banks suffer higher inter-bank rates, they will have to push up mortgage rates, even if the bank’s base rate remains unchanged.

Last week the Bank of England took the unusual step of issuing a statement with its rate decision. It said: “It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households.” There have only been two other occasions on which the Bank has issued explanatory notes since gaining independence from the Government in 1997, and both times were during global financial crises.

Economists saw the Bank’s move to raise the issue as an indication that it would be prepared to intervene in an attempt to hold the crisis back from affecting the wider economy. Last Wednesday it said it would inject £4.4bn into the markets to help get over the problems.

Businessmen in the UK feel that the turmoil in the markets will filter through to the country’s high streets and homes, with increased costs landing at the purses and wallets of the customers. It is forecast that the food manufacturing sector will be hit badly, following on from floods in the summer.

So far, consumer spending in the UK has remained buoyant during a damp summer, with hotels and shops faring well. They are, however, bracing themselves for a consumer slowdown.

Tom Smith
14th September 2007

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