Mortgage rates hit nine-year peak
Mortgage rates have soared to a nine-year high as the financial market crisis strikes millions of homeowners around Britain, it emerged yesterday.
# How the mortgage rates compare
# Banks ‘make up to �3.5bn from charges’
# Interest rates rise as credit crisis hits British borrowers
Suburban housing development: Mortgage rates hit nine-year peak
The average SVR rose by almost a quarter percentage point to 7.69pc last month
Even though the Bank of England has not raised its official interest rate, figures showed the borrowing costs faced by householders jumped dramatically last month.
In a major sign of how the so-called credit crunch is affecting consumers, Abbey will today become the first high street bank to raise the rates on a range of its standard tracker mortgages as a direct result of the market turmoil. And Standard Life was expected to do likewise tomorrow, with other major lenders poised to follow suit.
Nici Audhlam-Gardiner, the head of mortgages at Abbey, said: “These changes reflect moves in the market that have been experienced. We expect that these current trends will be sustained over a significant period and that other companies will follow imminently, given they will be under the same market pressure.”
The news comes as a major surprise and is the first sign that the credit crunch – which was sparked when the City’s banks stopped lending to each other in the financial markets, leading to a rise in their own borrowing costs – is hitting British homes.
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The economy could suffer a “Christmas crunch”, with consumer spending plummeting as a result of ballooning mortgage bills. That in turn have a knock-on effect on the wider economy, experts said. The longer the upheaval continues, they added, the higher the risk for jobs, wages and profits.
They added that with hard-pressed families more likely to default on their loans, mortgage lenders are now more liable to repossess people’s homes.
Although the Bank of England’s official rates are still at 5.75 per cent, the average standard variable rate (SVR) paid by millions of households rose by almost a quarter percentage point to 7.69 per cent last month. This is the highest level since the end of 1998, when the official interest rate was a full percentage point higher than now at 6.75 per cent.
The unexpected jump in mortgage costs will cause further misery for the million households expected to renew their home loan in the coming months. These families on two- and five-year fixed deals have been shielded from rate increases, but face a rise in their costs of more than 30 per cent when they renegotiate this autumn at much higher rates.
“A substantial number of homeowners will see their mortgage bills rise markedly during the latter months of the year as the cheap fixed-rates that they took out two years ago expire,” said Howard Archer, of Global Insight, the financial analysts. “Meanwhile, the higher money market interest rates resulting from the current financial market turmoil means that some mortgage rates are set to rise.”
He also predicted that the recent problems could push house price growth down “sharply”.
Some experts have said the financial market crisis of 2007 ranks with those experienced in 1998, when Russia defaulted on its debt and caused worldwide chaos, and in 1987, when stock markets crashed dramatically on Black Monday.
The problems started in the City’s complex money markets, where banks lend to each other – one of the most important parts of the financial system. Fearing that one of their number could be in financial trouble, the banks have effectively stopped lending money to each other. This has pushed up the borrowing costs they face and they are now passing these on to customers.
George Buckley, the chief UK economist at Deutsche Bank, said the increases could “potentially constrain consumption in the run-up to the all-important Christmas period”.
In the past five years, 2.3 million households have taken out mortgages at the SVR. In 2004, SVRs represented almost a third of all new mortgages, although the proportion has fallen since.
With the average SVR having increased from 6.4 per cent in the past year alone, a family with a �100,000 mortgage will now be paying an average of �108 more in interest each month, or �1,290 a year.
Ray Boulger, of mortgage advisers Charcol, confirmed Abbey planned to increase its tracker mortgage rates for new customers today. He added: “Once you get one mortgage lender doing this the others who have been holding off so far are likely to follow suit.”
As well as raising their costs, lenders are showing less patience towards borrowers who fail to keep up with their regular payments, experts have found.
The Council of Mortgage Lenders (CML) said recently that there had been a 30 per cent rise in repossessions in the past year.
David Owen, the chief European economist at Dresdner Kleinwort, said: “Lenders are giving far less of a grace period to borrowers than ever before. If you are considered a more risky proposition, you are more likely than previously to lose the house.”
As the full effects of the run on the bank this weekend are felt, sell and rent back cowboys are poised to jump on homeowners facing mortgage interest fears.
interest rates rise fears
