Lending rates 'must double' to beat price crash

The Council of Mortgage Lenders, which represents the UK’s banks and building societies, believes the small interest rate increases imposed by the Bank of England have been too little too late to avoid disaster.

If the organisation’s prediction is borne out then the current base lending rate would go up from 4.25% to 8.5%, meaning the typical mortgage rate would soar from around 7% to 10.5%.

That would immediately add hundreds of pounds to the price of monthly repayments.

For example, a buyer with an 80,000 repayment mortgage would see their monthly payment rise from 528 to 755. Those with bigger loans would find their monthly bills rise ever further.

A house buyer with a 160,000 mortgage, which is seen as relatively common nowadays, would have to find an extra 6,000 per year.

The findings from the Council of Mortgage Lenders, which will be published tomorrow, are based on its own assessment of the UK’s housing market. It claims that unless interest rates increase substantially, house prices will spiral out of control and then crash dramatically, leaving millions trapped in the nightmare of ‘negative equity’.

The director general of the organisation, Michael Coogan, said he feared it might be too late to head off a crash in the market with occasional small interest rate rises. In recent months, the Bank of England has taken to increasing their base rates by a quarter of 1% every month or so.

Coogan said in a Sunday newspaper interview: "There are risks for interest rates. Our simulations suggest that they should more than double if house price growth is to fall into single digits in the short term.

"As a result, it may already be too late for the Monetary Policy Committee to influence the housing market with small tweaks to interest rates. There is clearly a danger that we will reach a point where more aggressive interest rate hikes are necessary."

Coogan’s comments follow the publication of figures last week which showed that mortgage lending and levels of personal debt had reached all-time highs. Statistics from the British Bankers’ Association showed that net mortgage lending rose by 6.4bn last month, the highest figure ever, and more than 20% more than the 5.6bn average of recent months.

Lending on credit cards and personal loans also rose by 1bn last month, prompting fears that Britons’ collective debt will near the 1 trillion mark when the Bank of England publishes its figures next month.

Coogan’s comments represent a sharp change in tone from previous predictions issued by lenders. Some in the industry have sought to calm nerves by claiming that a small rate rise might lead to a cooling-off effect in house prices, meaning that while prices would still rise, they would not rise at their current frantic rate.

Mark Hemingway, a spokesman for HBOS, Britain’s biggest mortgage lender, said: "We think base rates will end the year at 4.75% or even 5%, but there will not be a drastic increase. We don’t foresee a crash, far from it.

"We don’t think interest rates will double and we don’t see a need for it. At the moment there is no sense that people should have cause for concern."

A spokesman for Citizens Advice warned that sharp mortgage rate increases would exacerbate the problems already caused by debts on cards and personal loans.

The world’s leading oil producers yesterday expressed "deep concern" about the effect of high oil prices on the world’s economy, but delayed a decision to reduce them.

At a meeting of the Organisation of Petroleum Exporting Countries in Amsterdam, ministers put off a decision to increase oil supplies until it meets again in Beirut on June 3.

Prices in the UK have soared in recent weeks, breaking through the 80p-a-litre mark.

The failure of oil producers to act will frustrate Chancellor Gordon Brown, who met fellow finance ministers from the rest of the G8 countries yesterday to discuss the crisis.