Borrowing costs expected to rise, families and firms warned

Published on 29/06/2012 01:28

HOUSEHOLDS and businesses should brace themselves for further increases in borrowing costs as the Bank of England warned yesterday that lending conditions are set to tighten further over coming months.

Banks are expected to pass on the higher costs they themselves are paying for funding to customers, continuing the gradual rise in loan rates which began in autumn last year.

The Bank of England report also warns banks will continue to limit the number of mortgages available, with the expectation they will set a higher test for people looking for a loan before agreeing to lend.

The flat-lining housing market will also depress availability for mortgages, the report said.

The gloomy news will put further pressure on household budgets which are already being hit by below-inflation pay rises and rising costs at the pump and in the supermarket.

More than a million home owners across the UK have already seen their mortgage rates increase due to a string of lenders putting up rates.

Recent figures showed that the cost of a typical two-year fixed mortgage deals with a 10 per cent deposit increased by 25 per cent from April to 6.04 per cent in May, the highest rate since January 2011.

Vicky Redwood, chief UK economist at Capital Economics, said the Treasury and Bank of England’s recently announced funding for lending scheme could help to offset some of the borrowing hikes.

But she cautioned: “With the economy probably still in recession, banks may remain reluctant to lend, while firms and households may not want to borrow.”