Eurozone crisis threatens longevity of cheaper mortgages

Mortgage rates hit record lows this week, but experts have warned rock-bottom prices won't be around for long unless eurozone woes are resolved.

According to Capital Economics research, the cost of banks borrowing money from each other has risen by approximately 2 per cent since June, so lenders may soon start cranking up their mortgage rates.

"Lenders have spent the past four months slashing rates so there are some really low fixed-rate deals on offer," Andrew Montlake of mortgage brokers Coreco explains. "But with the eurozone crisis deepening it's unlikely they will hang around."

Paul Diggle, a property economist at Capital Economics, says: "Developments in the eurozone appear to be adversely affecting the UK mortgage market. The latest rise in financing costs will do nothing to enhance lenders' willingness or ability to lend. This means the supply of mortgage credit over the next year is likely to remain restricted and could become more expensive."

The warnings come after Greece admitted it can't repay its sovereign debts on time and Italy saw its credit rating downgraded by Moody's, unsettling markets and sparking fears that UK banks are exposed – pushing their borrowing costs up.

But Nigel Stockton, the director of mortgage brokers Countrywide, said borrowers on a standard variable rate shouldn't panic just yet. "If the eurozone implodes, then this will cause an additional period of recession but this means an elongated period of 0.5 per cent base rate," he says.

"Borrowers should certainly not fix until next year if looking at a two-year term. Only if you are looking at a five-year plus deal would I do anything."

So far lenders are still competing aggressively on price, with Santander, Northern Rock and Leeds building society cutting rates in the past week. But price comparison site MoneySupermarket said borrowers should be wary of lenders' higher fees.

Mr Montlake says: "Best buy tables should not be taken at face value and time should be taken to work out whether a low rate with a high fee is better than a slightly higher rate with a lower fee."

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