Bank of England expected to hold interest rates

The Bank of England is widely expected to keep interest rates on hold today but this is unlikely to stop mortgage rates moving both up and down.

The cost of variable rate mortgages such as trackers has been increasing in recent weeks as lenders respond to higher borrowing costs due to the current turmoil in global credit markets.

At the same time many lenders have also cut the interest charged on their fixed rate loans.

Britain’s second biggest lender Abbey was the first to increase some of its tracker rates by between 0.1% and 0.2% for new borrowers in the middle of last month, and it was quickly followed by Halifax.

Since then Standard Life, other members of the Halifax Bank of Scotland Group, Alliance & Leicester and most recently Nationwide Building Society have all followed suit and increased their tracker rates.

Banks are raising their rates in response to the interbank lending rate, or Libor rate, hitting a six year high as a result of the crisis in the US sub-prime mortgage market, which lends money to people who would be turned down by mainstream banks.

High levels of defaults on these loans, which some claim should never have been advanced in the first place, have rocked global credit markets as the loans are packaged up and sold on to investors in order to spread the risk.

And while Libor rates have actually come down in recent days, other lenders are still expected to increase the cost of their tracker mortgage deals.

But at the same time as variable rate loans are increasing, the cost of a fixed rate mortgage is coming down in response to a fall in Swap rates, upon which the cost of these loans are based.

The UK’s biggest mortgage lender Halifax, Abbey, the Woolwich and Nationwide Building Society have all cut the interest charged on fixed rate loans in recent weeks.

Louise Cuming, head of mortgages at moneysupermarket.com, said: “In the past month we have seen a move away from what the Bank of England does with its interest rates being the be all and end all of what happens on the mortgage market. It now has more of a mind of its own.

“All lenders are looking at their bottom line and its costing them a little bit more to borrow money and that is going to be passed on to the consumer.”

She said she expected fixed rates mortgages to begin nudging up again, particularly for riskier lending.

She said lenders were also likely to begin competing against each other for the business of prime borrowers, such as those with large deposits, high salaries and good credit histories.

But she said people with poor credit records, those who self-certified their income, first-time buyers and people wanting to borrow a high proportion of their property’s value were likely to see their mortgages rates go up, creating a “borrowing underclass”.