Home loan rates may increase

MORTGAGES FOR new homebuyers are likely to rise despite the Bank of England's decision to keep base rates on hold, leading lenders warned yesterday.

The Council of Mortgage Lenders said that it was becoming more expensive for banks to borrow money long term on the international money markets as economists started to forecast rises in interest rates over the next few years. The banks had to recoup these extra costs from their customers, it explained.

Michael Coogan, the CML's director-general, said it was unlikely that variable mortgages would change in the wake of yesterday's decision to keep rates at 5 per cent.

But he added: "For new borrowers, the increase in the cost of raising longer-term funds on the money markets seen in recent weeks is likely to result in marginally higher fixed- and capped-rate products."

Mortgage lenders are already under fire for failing to pass on to borrowers the benefits of the last two 0.25 per cent interest cuts.

While base rates have fallen 2.5 per cent since last October, Nationwide building society, for example, has cut its standard variable rate from 8.5 per cent, in October, to a 33-year low of 6.45 per cent - a difference of only 2.05 per cent.

A borrower with a pounds 60,000 interest-only mortgage pays pounds 306.38 a month now, compared with pounds 403.75 in October. If mortgage rates had fallen to 5.95 per cent, the monthly payment would be just pounds 282.63.

A Nationwide spokesman said: "We have to balance the needs of our savers, who have seen rates cut."

Fixed rates have already started to climb. Last month Halifax, the UK's biggest lender, raised its five-year fixed rate by 0.5 per cent to 6 per cent, following the 1 per cent rise in the cost of five-year money on the global markets.

Promise, the remortgaging arm of Credit Suisse, said the bank's decision was a relief to mainstream lenders, whose "fat profit margins" had been squeezed by recent rate cuts.

Neil Walkling, principal money researcher for the Consumers' Association, said lenders had to respond to changes in global markets.

But he added: "We think banks should be fair and transparent. They should not sneak in extra savings cuts while pretending they are trying to protect savers. But we appreciate they have to manage their balance sheet."

Kevin Gardiner, an economist with the City bank Morgan Stanley, said the financial markets were expecting rates to rise to 6.5 per cent by the end of next year.

"Fixed-rate mortgages have been selling like hot cakes. Not for the first time, the humble consumer may have been quicker than many City analysts at spotting a potential turning point in interest rates."

Euro tumbles, page 18

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