Fixed rate mortgage rates rise rapidly

16 May 2008 / by Rebecca Sargent
New customers seeking a fixed rate deal are facing a shock as interest rates have risen to the highest level in eight years.

According to Moneyfacts.co.uk, the average rate for a two year fixed-rate mortgage today stands at 6.84 per cent compared with 4.34 per cent just two years ago.

Consequently, someone with a typical home loan of £200,000 on a rate of 4.34 per cent two years ago now face a rise of more than £200 on their monthly payments. Similarly someone who took out a loan of £250,000 two years ago looks set to pay an extra £500 a month when they remortgage.

As the cost of living rises as a result of increased food costs and energy prices, mortgage rate rises are doing nothing to boost the UK's slowing economy.

The effects of the credit crisis are beginning to worsen; this week has already seen reports of a rise in the number of repossessions and these latest mortgage figures look set exacerbate this trend.

Mortgage expert Charcol has released figures stating that more than three quarters of borrowers chose a fixed rate for their new applications in March this year. According to the study of applications this trend became more popular through April as "borrowers sought security in fixed rates."

According to Katie Tucker, technical manager at Charcol, "This second consecutive jump may imply that borrowers are nervous about the strength of the economy and fear that rates will soar as they did in the early 90s, but such a hike is extremely unlikely; the economy as a whole is strong, economic growth is a priority for the MPC, and unlike the early nineties, when bank rate policy was straight-jacketed by the Exchange Rate Mechanism, we are unlikely to fall into such a recession."

Nevertheless, the Bank of England's Mervyn King yesterday warned of a "bumpy road" ahead as the economy rebalances. And, according to city experts, his acknowledgement of a potential recession has dashed predictions from some analysts that cheaper home loans were just around the corner.

Further statistics from Moneyfacts.co.uk have shown that it is not just fixed rate mortgage rates that are squeezing borrowers. According to its figures, although the majority of lenders promised to cut their standard variable rate as a result of the Bank rate cut over a month ago, most of them have passed on an insignificant cut.

Michelle Slade, analyst at Moneyfacts.co.uk, said: "It is now five weeks since the last base rate cut and still 24 lenders (25 per cent) have not announced their intentions with regards to their standard variable rate (SVR). Of those lenders that have done so, 20 (28 per cent) have announced a cut of less than 0.25 per cent. Even more disappointing is the fact that those lenders which have past on the smallest cuts offer some of the highest SVR rates."

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