Troubled Financial Market Forces Borrowing rates to rise, again

Amid the recent world wide financial crisis it looks very likely that the cost of borrowing for mortgages products will continue to rise. The banks are blaming this on the worldwide financial crisis.

Towards the end of the summer the Council for Mortgage Lenders (CML) had reported a decrease in the cost of borrowing for fixed rates mortgages; these particular mortgages were targeted at consumers who are seen as low risk. Indeed the cost of borrowing had begun to drop for many clients who were seen as low risk on typical two year fixed rate deals, until the collapse of Lehman brothers, the forth largest bank in the world, and the insurance group AIG went into receivership.

The Abbey, the second biggest mortgage lender and part of the Spanish ‘Santander Banking Group’, the Nationwide Building Society and it’s subsidiaries, including the Mortgage Works, BM Solutions, the subsidiary of HBOS are just some of the mortgage lenders to have removed mortgage products from the market. In addition some of the banking and building society institutions including some of the above have begun to raise their cost of borrowing on mortgages for their customers.

The Yorkshire Building Society raised its lending rates by just under half a percentage point yesterday. The Abbey intends to remove some of its most competitive mortgage products from the market at the close of play tonight. The Yorkshire Building Society had commented that it had no choice but to raise its lending rate following a surge in the number of mortgage applications it had received in the previous two weeks.

Much of the recent trouble, including the previously mentioned collapse of Lehman Brothers and the uncertainty around the future of the Special Liquidity Scheme (SLS) have led to a rise in the LIBOR (the inter-bank lending rate). Much of this was confirmed by Yorkshire Building Society which said it had little choice but to increase its lending rates after the recent drastic increase in mortgage applications. The Yorkshire Building Society also blamed the inter-bank lending rate.

The sudden removal of mortgage products from the market, by many of the lenders, could be seen as a worrying sign. Moneyfacts.co.uk commented that: “It’s like suddenly having the tap turned off again.” This coupled with the fact that the Woolwich, Northern Rock and Lloyds TSB are all expected to raise their rates over the coming days does little to allay speculator’s fears.

Two years ago, the best mortgage deal available on a two year fixed, for a 150,000 mortgage, was 4.59%; today it stands at 5.49%; although the rise seems insignificant, this would, in real terms add 112 to monthly repayments. A rise in monthly mortgage repayments of 112 could be a lot for a modest family on a reasonably tight budget. To put the situation in perspective, an average family coming to the end of their fixed rate deal, at the moment, would be facing a rise in monthly mortgage repayments of around 20 percent.

This is a simple case of supply not meeting demand. When there is little supply, in the case, in both the number or mortgage products in the market and cash available in the banking system, the cost of the actual products (in this case being mortgages) can only go one way and that is up.