Credit downgrade threatens higher mortgage rates

 

Moody's threat to the UK's prized AAA credit rating could spark a major rise in home loan costs.

Ray Boulger, technical director of one of the UK's biggest mortgage brokers, John Charcol, said: "Any [credit rating] 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."

Last week, UK government debt was put on "negative outlook" by the credit ratings agency Moody's, meaning there is a 30 per cent chance of a downgrade within the next 18 months. Already the crucial Libor, the market rate for banks loaning to one another, has been inexorably rising this year, as a result of the continuing eurozone crisis. This has led to increasing mortgage rates, Mr Boulger says, particularly in the tracker, two- and three-year fixed-rate markets.

The Moody's downgrade threat should be a wake-up call for consumers. David Black, a banking analyst at the financial information firm Defaqto, said: "No one is certain as to what will happen with the credit rating and how this could impact personal finances. So, try to 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 taxpayer, look at the possibility of an offset mortgage."

But it's not just mortgage rates that consumers would have to worry about if there was ultimately a downgrade of UK debt. "Any increase in government borrowing costs or the pressure of a potential downgrade is likely to lead to higher personal taxes. 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," Mr Black warned.

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