Mortgages to rise as crisis grips the markets
Published
07th Sep 2007
Home owners are facing fresh misery as experts predict mortgage rates will rise as a direct result of the crisis that has gripped the financial markets.
Any increase in rates would be a severe blow to Britain's 17 million mortgage borrowers, who have had to cope with five rises over the past year.
It would also be the first sign that the turmoil in the global money markets has crossed over the Atlantic and is starting to hit British consumers.
Yesterday, the Bank of England left base rates on hold at 5.75pc but City experts fear that high street banks - under intense pressure from the financial chaos - will be forced to act.
Evidence has already emerged that banks are preparing the ground for higher mortgage rates.
In the past few days, five banks have increased their savings rates to around 6.7pc, according to Moneyfacts.co.uk, a leading financial research firm.
While this is great news for savers, economists warn that there is a sting in the tail. Danny Gabay, an economic consultants and 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." Mr Gabay added: "Banks fear this is a problem that will stick around."
Higher mortgage costs will be particularly harsh for two million home owners already expecting to be hit by a sharp escalation in their monthly payments, as their fixed rate deals - taken out at rock bottom rates around two years ago - come to an end over the next few months.
The Nationwide building society estimates that a quarter of a million mortgage holders will see their payments increase by £200 each month from October. 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 6.04pc at the start of last month to 6.87pc yesterday.
Melanie Bien, a director at Savills Personal Finance, said: "The longer this turmoil goes on the more likely it is to hit consumers directly.
''Banks will have to start repricing their mortgages upwards, even if interest rates do not increase. The reality is that banks cannot absorb all these costs."
Demonstrating the severity of the crisis, the Bank of England took the highly unusual step of issuing a statement alongside its interest rate decision yesterday. The Bank has resorted to an explanatory note on only two occasions when holding rates since being granted independence in 1997. Both times were during global financial crises.
"It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households," the statement said.
Economists said the mere fact that the Bank raised the issue indicated that it was prepared to intervene to prevent the money market crisis spilling into the wider economy. On Wednesday, it pledged to inject £4.4 billion into the markets to help alleviate the problem.
Leading businessmen believe the turmoil will start to filter through to Britain's high streets and homes, and that they will be forced to pass on any increased costs to customers.
David Dilger, the chief executive of Greencore, the UK's largest sandwich maker supplying all the major supermarket chains, said yesterday: "Unless the situation changes pretty quickly the entire food manufacturing sector will be hit pretty badly.
''It won't be long before the increase in the interbank rates starts to appear on the bank statements of every single borrower."
With the high cost of raw ingredients, food companies will have no option but to increase their prices to customers - shops and caterers around the country.
Consumer spending has remained surprisingly strong throughout the summer, with Britain's hotels and shops enjoying a bumper time. However, Travelodge, one of the country's largest chains, said it was preparing for a sharp consumer slowdown.
By Philip Aldrick and Harry Wallop
Source: '
Telegraph '
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