Jittery City urges investors not to panic, as mortgage lenders put squeeze on homeowners

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The Independent Online

The turmoil on the financial markets has hit British homebuyers and property owners with floating mortgages. They now face a rise in their borrowing costs after mortgage providers rushed to tighten their lending criteria.

The global credit squeeze, which has put stockmarkets into freefall in recent weeks, has forced lenders to increase their mortgage rates to customers with weak credit histories – known as sub-prime borrowers – and experts believe mainstream mortgage rates will follow.

The reason is the massive falls in shares prices and other assets, which have made banks extremely nervous about lending money and has put up the price of finance. Northern Rock is among lenders increasing mortgage rates across a range of products.

Andrew Hagger at Moneyfacts, the financial research website, said: "Unless the markets stabilise over the next three to four weeks, other banks may also start raising mortgage rates." Philip Thornton, at Clarity Economics, added: "Lenders in every part of the financial universe are starting to reassess the risks they are taking on after years of blithely ignoring them. There is no reason to expect that mortgage lenders will behave any differently."

Around 8 per cent of the UK's 12 million mortgage holders are sub-prime borrowers, with the sector worth around £30bn. Edeus, Mortgage plc and Kensington are among sub-prime lenders to have raised rates or are poised to do so.

A dramatic intervention on Friday by the US Federal Reserve, which cut the rate at which it lends to banks, helped to cap some of last week's stockmarket losses. Traders will be watching for any sign that the US central bank intends to cut its main interest rate if next week proves just as rocky for investors.

Jim Wood Smith, at Williams de Broë, said it was too soon to be confident the Fed's move had solved the crisis, sparked by thousands of Americans defaulting on their sub-prime mortgages. "I suspect sober reflection over the weekend will focus on the likely downside of this move."

In the UK, some influential figures in the City have urged investors "not to panic". Thus far, the Bank of England has stayed firmly on the sidelines, refusing to step in either to inject cash or to cut its base rate.