Credit crunch: Lenders raise cost of home loans despite easing of money market rates

Credit crunch: Lenders raise cost of home loans despite easing of money market rates

Banks are jacking up the cost of fixed rate mortgages despite a fall in long term interest rates, according to the latest figures. Fixed rate deals over two or three years average more than 7% and look likely to climb further while the cost to the banks of supplying the funds has been falling.

The average cost of a two-year fixed-rate loan has risen to 7.07% in the past two weeks, up from a recent 11-year high of 7.02%, financial data provider Moneyfacts.co.uk said yesterday.

Lenders originally raised the cost of their fixed-rate deals in response to steep increases in swap rates due to speculation that interest rates could rise because of inflationary pressures.

Despite a fall in swap rates - which set the borrowing rates between financial institutions on which fixed-rate mortgages are based - only a handful of lenders have reduced the rates on their fixed-rate deals.

Darren Cook, mortgage analyst at Moneyfacts.co.uk, said: "It is now three weeks since the peak in swap rates and we would expect to see the cost of fixed-rate deals starting to fall, but this isn't the case. In fact the opposite is true, with rates continuing to rise."

Experts warned there was little hope of an end to the housing slump if the cost of mortgages increased further. House prices, would continue to fall as long as buyers were restricted by the high cost and limited availability of mortgage funds.

Liberal Democrat Treasury spokesman Vince Cable, said.....continued below

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last night at the Institute of Fiscal Studies annual lecture that the continuing impact of the credit crunch on the property market meant rules restricting local authorities from buying properties should be eased. He called for councils and other registered social landlords to be encouraged to buy houses and flats on a large scale to provide homes for the homeless or for those who cannot afford to buy or rent in the private sector.

"The government is in a state of denial about the economy," he said. "It does not seem to realise that a recession is looming combined with painful inflation and that the housing market is in a state of collapse dragging down construction companies and mortgage lending banks as well as, potentially, millions of home buyers.

"We suggest that the government's plan for property acquisition - £200m, about 1,000 homes over several years - should be on a much bigger scale, perhaps 100 times bigger. Social landlords should be given the freedom to buy unsaleable properties at a deep discount to meet local housing needs."

People taking out a three-year fixed-rate loans have been the worst hit, with average rates rising to 7.25%, while the cost of a five-year fixed-rate mortgage is now about 6.93%.

Cable said he was concerned that the rising cost of monthly mortgage repayments was forcing people to increase their credit card borrowings. A study for financial adviser website unbiased.co.uk, showed that the average British consumer had increased reliance on short term unsecured credit over the last year.

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