Two-year fixed-rate deals hit 7%

The interest rate on the average two-year fixed-rate mortgage has risen above 7%, according to the financial information service Moneyfacts.

It means these loans are at their most expensive since February 1997.

The credit squeeze and shortage of mortgage funds has led to a sharp rise in the cost of borrowing to buy a home.

With lenders demanding larger deposits, the number of two-year fixed-rate mortgage deals available for 95% loans has almost disappeared, at just 12.

Moneyfacts said the rising cost of borrowing between lenders was being passed directly to customers.

"Lenders are also taking an increased margin on top as they price their products for risk," said Darren Cook at Moneyfacts.

"The average standard variable rate (SVR) today stands at 7.02%.

"With most lenders not charging a product fee for moving onto their SVR, this is becoming a more viable option for many at the moment," he added.

Limited choice

Two-year fixes have been among the most popular sorts of loan in the past couple of years, especially among first-time buyers.

But the former wide choice of short-term deals is disappearing fast.

The Woolwich, for instance, now offers only either a five-year or 10 year fix. The Bristol & West has only a five-year deal on offer, as does its parent bank, the Bank of Ireland.

"The sort of choice that you have as a first-time buyer is now severely limited," said Aaron Strutt at mortgage brokers Chase De Vere.

Earlier, the British Bankers' Association revealed that the number of mortgages being approved for house buying had slumped by nearly 60% in the past year because of the mortgage squeeze.

Rising costs

With lenders having to ration their money, all the main mortgage firms, such as the Halifax, Nationwide and Abbey, have been pushing up the cost of their home loans.

This has been reflected not only in higher interest rates, but also in demands for larger deposits and the payment of larger upfront arrangement fees, which could previously be rolled up into the loan.

With house prices falling, lenders have been motivated by a desire to protect themselves against the possibility of losing money if their borrowers subsequently default on their payments.

In January, the average two-year fix was being priced at 6.61%.

Back in June last year, deals like these were costing borrowers just 6.2% - nearly one percentage point cheaper than the current average rate of 7.02%.

The increase in the past year will have added £77 to the monthly cost for someone taking out a typical home loan of £150,000, with both interest and capital repayable over 25 years.

Such a loan will now take £1,073 out of a borrower's take-home income.

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