Downgrade in Britain's credit rating could prove expensive for mortgage holders

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The Independent Online

Mortgage rates could rise dramatically if Britain loses its prized AAA credit rating, experts are warning.

Last week, UK government debt was put on "negative outlook" by the credit ratings agency Moody's, giving it a 30 per cent chance of a downgrade within the next 18 months.

Such a downgrade could not only hit Britain's prestige, but also the pockets of millions of mortgage holders.

Ray Boulger, the technical director of broker John Charcol, says: "Any downgrade could push up the rate that the Government has to pay in order to borrow, and if this happens then this should filter through to banks' borrowing costs and ultimately what you pay when it comes time to remortgage."

This is despite suggestions by many City analysts that the Bank of England base rate, which is currently at 0.5 per cent, will stay at historic low levels for potentially years to come.

It is also by no means certain that a downgrade will actually push up the government's borrowing costs.

"It's a bit of an anomaly, but since the United States lost its AAA credit rating the cost of its borrowing instead of going up has actually fallen 50 basis points," Mr Boulger says.

David Black, a banking analyst at the financial information provider Defaqto, is urging consumers to take steps now to protect themselves.

"No one is certain as to what will happen with the credit rating and how this could impact personal finances; so try and pay off expensive debt, review your existing arrangements, and if you have a reasonable level of savings and a mortgage and are a higher-rate tax payer, look at the possibility of an offset mortgage," he says.

But it's not just mortgage rates that consumers would have to worry about if there was ultimately a downgrade of Britain's credit rating.

"Any increase in government borrowing costs or the pressure of a potential downgrade is likely to lead to higher personal taxes," Mr Black says.

"After all, the Government will need to fill its black hole and crucially show foreign investors that it is serious about getting the deficit down."

There could, though, be better news for people looking to convert their pension pots into an annuity – an income for life – from a UK downgrade.

It could potentially reverse some of the damage wrought to annuities by the Bank of England's programme of quantitative easing (QE).

"It's been pretty much bad news for annuity savers for the past few years, made worse by QE," says Tom McPhail, Hargreaves Lansdown's head of pensions research.

"If government borrowing costs did rise again, then on the surface it's likely that annuity rates will all also increase, meaning finally people will be getting more for their pension pot."

However, a severe deterioration of the UK Government's credit position could have the opposite effect.

Mr McPhail warns: "If things get really bad, pension funds could be forced to move away from UK gilts altogether into even lower-yielding – but safer – investments, which could mean rates continue to fall long term."

Meanwhile, many interest-only borrowers are facing a nervous wait to see if they will be allowed to remortgage or even stay on their existing deals.

Lloyds customers have been told they will have to provide proof they have an investment vehicle in place capable of repaying the capital on their mortgage.

"Outside of the long-term, fixed-rate mortgage market, things are tightening up and getting more expensive for mortgage borrowers," Mr Boulger says.

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