Page last updated at 12:02 GMT, Wednesday, 23 July 2008 13:02 UK

US mortgage rates increase again

Fannie Mae building
Fannie Mae and Freddie Mac are central to the US housing market

The cost of taking out a mortgage in the US has climbed again due to fears over the fate of two huge lenders, according to The New York Times.

The interest rate on an average 30-year fixed rate mortgage rose to 6.71% from 6.44% on Friday, HSH Associates says.

And rates on loans of $729,750 or more hit 7.8%, the most since December 2000.

The rate rises come as the US is trying to secure the future of troubled government backed lenders Fannie Mae and Freddie Mac.

The federal government has set out a rescue plan for the two giant lenders, which back almost 50% of the US's $12 trillion loan market, but it still needs Congressional approval.

Shares in the two lenders had fallen sharply on fears that they did not have enough capital to survive the credit squeeze.

Under the plan, the US government would explicitly guarantee their solvency until December 2009.

But some Congressional Republicans oppose the deal, despite the backing of US Treasury Secretary Hank Paulson.

Housing distress

House prices in the US are falling at an annual rate of 25% in major metropolitan areas, as lenders pull back on making mortgages available to curb potential losses.

But the rise in interest rates, which makes it more expensive for borrowers to pay back their monthly payments, will also make it harder for new buyers to enter the market.

Though the US benchmark interest rate has been falling and now stands at 2% it is becoming more expensive for borrowers to take out loans, with banks still reluctant to lend to each other, making the availability of credit limited.

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