Page last updated at 11:50 GMT, Friday, 17 July 2009 12:50 UK

Gloomy outlook for mortgage costs

Browsing an estate agent's window
Mortgage lending has picked up in recent months

The long-term cost of mortgages is likely to rise as lenders continue to resist taking on too much business, brokers say.

The cost of funding certain mortgages has fallen but lenders have failed to drop home loans costs in response.

The amount banks charge to lend to each other, measured by the Libor rate, has fallen below 1%.

An industry body said restoring the stability of the financial system was costing money in the current climate.

And brokers said that mortgage rates remained at relatively low levels.

Marginal decision

The rate banks charge when they lend each other money is the London Interbank Offered Rate, or Libor.

Libor rate Jan-July 2009

Six months ago, three-month Libor stood at 2.24%, but this had dropped to 0.97% on Thursday. This is used to fund variable rate mortgages - but rates for tracker deals have moved relatively little.

Changes to mortgage costs do tend to lag behind moves in Libor. However, the margins between funding and the amounts charged by lenders has widened, according to price comparison website

"Banks and building societies are benefiting from the lowest borrowing rates for two decades but this is not being passed on to consumers," said the website's head of mortgages Louise Cuming.

With house prices having fallen, first-time buyers who might see the opportunity to get on the housing ladder would be among the keenest for mortgage costs to dip.

"Thousands of borrowers, especially first-time buyers, will read that the cost of funding is at a record low and wonder why there are not more deals open to them," said Aaron Strutt, mortgage broker for Trinity Financial Group.

"With the cost of borrowing reduced and the vast sums of taxpayers money used to rescue many banks, those with a smaller deposit would like to see more reasonably priced deals available."


Lending has picked up slightly in recent months, and the Council of Mortgage Lenders stressed that lenders were facing a range of higher costs in order to boost stability for banks and building societies.

Lenders still have a very limited appetite for mortgage business
David Hollingworth, London and Country

They included the need to build up capital, the effect of low interest rates and the need to attract savers.

David Hollingworth, of London and Country Mortgages, said lenders did not want to overstretch themselves.

"Lenders still have a very limited appetite for mortgage business. Libor suggests that the position is starting to ease but I would be very hesitant to says this will transfer through to mortgage products," he said.

He said that dropping rates too much would make a lender so competitive that they might pick up more custom than they could cope with or fund.

The key to the funding of fixed-rate mortgages are swap rates - the guide price used by lenders on long-term loans - and these have been relatively volatile in recent times.

Brokers say that while fixed-rates might dip in the short-term, the long-term trend was likely to be upward.

"We can talk about rates as if they are sky-high, but they are still quite low," Mr Hollingworth said.

Some deals for five-year, fixed-rate mortgages were still available at below 5%, having been below 4% a few months ago.

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