Bank turmoil could push up mortgage rates

Mortgage rates could be on their way up again as a result of this week’s market turmoil, experts warned today.

One of the key inter-bank lending rates, three-month Libor, has risen from 5.7% at the end of last week to 5.87% today, signalling a renewed reluctance among banks to lend to each other.

Commentators described the increase as “significant”, adding that it bucked the recent trend of the rate slowly and gradually coming down.

The fall in wholesale funding costs had led to the majority of the UK’s largest mortgage lenders making repeated cuts to the cost of their deals, as they once again competed for business.

This had led to two-year fixed rate mortgages returning to the level they were at before the credit crunch first hit, with a number of lenders offering sub-5% deals.

But recent events in the markets, including the collapse of Lehman Brothers and confirmation that HBOS is in merger talks with Lloyds TSB, are likely to put an end to this trend.

While traditionally, Libor rates only impact the cost of variable rate mortgages, the increase in the rate indicates a renewed wariness among banks, which may mean they also stop passing on any reductions in swap rates to new fixed-rate mortgage customers.

Melanie Bien, director of Savills Private Finance, said: “This is a real set back. We had started to see new fixed rates and tracker rates fall and the worry now is that will start to reverse as the cost of borrowing goes up.

“If three-month Libor rates continue to rise over the next few days, we would be looking at increases (in mortgage deals) in a couple of weeks.”

She added that people who were coming up to remortgage should get a deal now.

David Hollingworth, of London and Country, said: “If Libor goes up substantially that would impact funding costs and that would filter down to high street rates.”

But he added that he had not seen a “knee-jerk reaction” from lenders so far.

Louise Cuming, head of mortgages at moneysupermarket.com, said: “For the past few weeks the trend has been for mortgage rates to come down and the number of available mortgage products to increase, giving a glimmer of hope to those looking to remortgage or buy.

“However, since the collapse of Lehman Brothers we’ve already see a huge jump in the Libor rate and I fear we’ll soon see lenders raising mortgage rates due to this. We may also see further tightening of already very tight lending criteria.”