More woe looms for homeowners: The upheaval in the money markets could start mortgage rates rising once more. Maria Scott explains

MORTGAGE rates are rising for thousands of homeowners, and more borrowers are set to suffer because of turmoil in the money markets.

As the Government pondered the parlous state of the pound this week, borrowers with loans from Bank of Ireland learnt that they will pay the price from next month for the rising cost of wholesale money.

Rates in the wholesale market move independently of the bank base rate but can anticipate base rate increases.

Bank of Ireland's UK mortgage subsidiary, Home Mortgages, is raising its standard variable rate from 10.99 to 11.25 per cent from 1 October.

About 10 to 15 per cent of Bank of Ireland's 38,000 borrowers have higher rates because they were deemed a riskier lending proposition when they took out their loans. These borrowers will pay up to 11.95 per cent from next month.

Bank of Ireland's move follows a similar one by Skipton Building Society, which raised its rate for existing borrowers to 11.25 per cent from 10.75 per cent in the middle of August.

New borrowers now pay 10.99 per cent, also up from 10.75 per cent. So far Skipton is the only building society to have raised rates. Most have cut the returns they pay to savers instead.

Specialist mortgage lenders such as Bank of Ireland, which rely exclusively on the wholesale money markets, have no savers to fall back on and react quickly to rising money market rates.

Bank of Ireland's move means that someone with a pounds 60,000 mortgage - the average-sized loan on the bank's books - will pay pounds 492.19 a month for an endowment mortgage, a rise of pounds 11.38. This assumes the borrower is paying the new standard rate of 11.25 per cent.

About 30 per cent of the bank's borrowers have fixed or capped rate loans and they will be shielded from the increase.

The Mortgage Corporation has just reduced its standard variable rate to 10.99 per cent from 11.75 per cent, but Leroy Rothe, its chief executive, said it would probably have to rise again.

'Looking at where the London interbank offered rate (Libor) is trading, rates are probably going to have to rise,' he said. 'Our funding costs are increasing, so margins are being cut.'

Citibank, which has a standard rate of 11.24 per cent on loans over pounds 100,000 or 11.7 per cent up to this amount, is also looking closely at rates. Stephen Balme, mortgage marketing director said: 'They are on a knife edge.'

At First Mortgage Securities, which is no longer taking on new mortgage business, the standard variable rate is already 11.65 per cent, having come down from 11.95 per cent at the beginning of August.

The chief executive, Nick Deutsch, is not comfortable with the balance between the company's new rate and wholesale funding costs.

'The wholesale markets are indicating an increase in the base rate of at least 0.5 per cent,' he warned. 'If that happens we will act accordingly.'

Household Mortgage Corporation is charging 11.45 per cent at present, a rate that dropped in July from 11.95 per cent. The corporation continues to maintain that building society rates are unrealistically low.

The leading building societies and banks say they can hold their present mortgage rates but would have to review them if the base rate rises.

Richard Boulton, chief economist at the Abbey National, said that if the French vote 'no' to the Maastricht agreement in a week's time this could force an increase in mortgage rates.

The Government might avoid a rise in the base rate, but this would not let lenders and their borrowers off the hook.

'The key for us is the money market rate,' Mr Boulton said.

NatWest Home Loans is currently charging 10.69 per cent. Its managing director, Gil Gillis, said: 'Like everyone else we are watching what is happening in the market. There is tremendous nervousness and uncertainty.'

David Gilchrist, general manager of Halifax Building Society, added: 'We will seek to avoid any increase in interest rates, or at least try to minimise the effect of any increase given the already fragile state of the housing market.'

Meanwhile, uncertainty over interest rates and the rise in the cost of wholesale money is making it difficult for lenders to buy funds at attractive prices for fixed and capped rate mortgages.