Mortgage fears on market turmoil

Some UK mortgage rates are rising as a direct consequence of the recent turmoil in world financial markets.

Most affected are home loans to people with a poor credit history, where rates have risen by up to 2.5%.

But even borrowers with a good credit history could find variable rate mortgages rising.

Only rates fixed over two years or more are falling, as lenders anticipate no more interest rate rises from the Bank.

But Geoffrey Dicks, chief UK economist of Royal Bank of Scotland told Radio 4's Money Box programme that he expects all mortgage rates to rise.

"One thing certain that will come out of this financial turmoil, is that the general level of mortgage rates - and other interest rates for that matter - will be higher relative to the Bank of England's official base rate.

"The world is now a riskier place and the banks will be charging more to pay for that risk"
Geoffrey Dicks, chief UK economist of Royal Bank of Scotland

"So even if the Bank does nothing, interest rates charged to borrowers will be a little bit higher."

He said the reason was simple.

"Banks across the globe are going to take a hit to their profits.

"They are going to try to re-establish their profit margins.

"So they will look to increase the spread between the rates they pay to savers and the rates they charge to borrowers.

"The world is now a riskier place and the banks will be charging more to pay for that risk."

But Ray Boulger, technical manager at mortgage brokers John Charcol, said things were not that bad - yet.

"The market has re-assessed where bank rate is going and more people think bank rate will peak at 5.75%"
Ray Boulger, technical manager, John Charcol

"The changes are mainly in the 'sub-prime' market for people with adverse credit histories.

"There, rates have gone up by anything between ½% and 2.5% and some have put rates up twice in a week.

"Also the maximum loan to value has been cut by many lenders by 5% so borrowers will need bigger deposits."

And he thought that the higher rates would be confined to mortgages which followed the official Bank rate of interest

"If borrowers have good credit and want a floating rate, banks will increase their margins because of the way they fund floating rate mortgages.

"The cost of that has gone up a lot so it is quite likely that over next two to three months the best tracker rates will increase by 0.1% or 0.2%."

But he said if you wanted a fixed rate then you should get a better deal now than a few weeks ago.

"For customers with good credit histories the cost of fixed-rate mortgages has been falling because the market has re-assessed where bank rate is going and more people think bank rate will peak at 5.75% [where it is now].

"So many lenders have cut fixed rates by between 0.1% and 0.5%."

BBC Radio 4's Money Box was broadcast on Saturday, 1 September 2007 at 1204 GMT.

The programme was repeated on Sunday, 2 September at 1502 GMT.