The Bank of England this week kept interest rates at 0.5 per cent for the 34th successive month, yet the cost of trackers and short-term fixed-rate mortgages is edging up. And with pressure growing on lender margins, experts believe mortgage rates may continue rising over the coming months.
The average cost of a fixed-rate mortgage reached a low of 3.83 per cent in October, while tracker rates fell to 2.73 per cent the same month, Council of Mortgage Lender figures show. Last year also saw a marked increase in the number of loans available, with improved deals for first-time buyers.
But that revival may be short-lived, with banks and building societies hit by a rise in wholesale lending costs. Fears over an increased chance of loan defaults as the eurozone crisis escalated have driven up the cost of lending between banks.
The London interbank offer rate (Libor), which is used to set fixed-rate mortgage costs, has jumped to 1.09 per cent from 0.83 per cent six months ago, squeezing lender margins.
A spokesman for the Council of Mortgage Lenders told The Scotsman: “The knock-on effects from the eurozone difficulties have increased the cost, and reduced the availability, of funding in recent months. While competition between firms has largely prevented these pressures being passed through into the pricing and availability of retail mortgages so far, the position remains finely balanced.”
However, Ray Boulger, senior technical manager at broker John Charcol, said the cheapest tracker deals have risen by more than 1 percentage point since Libor began to edge up.
“Six months ago three-month Libor was 0.83 per cent and the cheapest lifetime tracker rates on offer from two of the most competitive lenders, ING Direct and Woolwich, were Bank rate plus 1.89 per cent and Bank rate plus 1.97 per cent respectively. The lowest rates now available from these lenders are now Bank rate plus 3.24 per cent and Bank rate plus 2.99 per cent respectively.”
Boulger spoke a week after the Bank of England predicted a fresh tightening of lending criteria over the coming months, which would make it harder for homeowners to secure mortgages. Higher wholesale costs and revised expectations over household incomes mean lenders are likely to reduce credit availability, the Bank said.
Mark Dyason, director of broker Edinburgh Mortgage Advice, said: “There is just less money to go round, hence increased costs. Once the current round of fixed-rate tranches is exhausted I expect these to rise as well, to reflect the cost of funding. Trackers are going up now, as they can be repriced sooner.”
And Dyason warned that homeowners with fixed-rate mortgages given in the wake of the credit crunch but now coming up for renewal would be moved onto more expensive standard variable rates than typically offered over the past three years. “First-time buyers will not get any help and the much vaunted buy-to-let explosion will suffer for lack of funding,” he added.
But not all mortgages are going up in price. The cost of the typical five-year fixed rate loan has fallen in recent months, with several costing as low as 3.5 per cent, according to Boulger.