Mortgages 'stuck on high rates'

The availability of mortgages will remain subdued, lenders say

Mortgage deals are getting more expensive despite a drop in a key indicator, says financial information service Moneyfacts.

Swap rates, normally the key to mortgage rates, peaked three weeks ago but some fixed rate mortgages continue to increase in price.

The average interest rate for a two-year fixed rate mortgage now stands at 7.07%, according to Moneyfacts.

Lenders say they are facing a much lower volume of business.

The Council of Mortgage Lenders (CML) added that the effect of the Bank of England's scheme to free up inter-bank lending is yet to be felt by borrowers.

The rising cost and lack of availability of mortgages is primarily a concern for new borrowers, such as first-time buyers, or those looking to remortgage as their fixed term deal is coming to an end.

'Misery'

The average interest rate for a two-year fixed rate mortgage has risen from 6.52% on 16 June to 7.07% on 7 July, according to Moneyfacts. The average three-year deal was up from 6.47% to 7.25% in the same period.

Consumers are now beginning to give up and demand is falling, with confidence in the housing market falling with it Michael Coogan CML director general

Borrowers coming to the end of a three-year deal on a £150,000 mortgage could see a £158 monthly increase in repayments if they wanted to fix for another three years.

The group says that rates should have been falling as swap rates had fallen, after peaking on speculation that interest rates could rise more than once in 2008.

"There doesn't appear to be any let up in the misery for borrowers. Lenders need to start playing the game fairly and pass on the cut in swap rates as quickly as they pass on the increase," said Darren Cook, of Moneyfacts.

But the "normal relationship" between swap rates and the cost of mortgage deals had broken down, according to a CML spokesman.

He added that lenders were facing much lower volumes of custom.

Special scheme

The Abbey and Nationwide announced on Friday that they were trimming the cost of some fixed rate and tracker deals.

The bank attempted to help lenders operate during the credit crisis

But these small cuts came after increases which were replicated by big lenders such as the Halifax and NatWest.

A survey of lenders by the Bank of England, published on 3 July, revealed that lenders were expecting another three months of tight availability and rising costs of mortgages.

This view came despite the Bank of England's efforts in April to free up inter-bank lending through its special liquidity scheme.

The CML said that the effect of this move to ease the credit crisis was yet to be felt by borrowers.

"Neither the cost nor the availability of wholesale funds has improved for lenders since the Bank of England launched its special liquidity scheme, helpful though that scheme is," said CML director general Michael Coogan.

"This means that cost and availability to customers has not improved either. And this in turn means that consumers are now beginning to give up and demand is falling, with confidence in the housing market falling with it."

The CML said it hoped the effect would eventually feed through in the coming months, but added it remained impossible to tell what level costs might have hit if nothing had been done.

Mr Coogan called on the chancellor to be flexible enough to help deal with the situation if the current market conditions persisted.