Huge leap in fixed-rate mortgage costs

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by Kay Murchie

The combined effects of interest rate rises and increases in financial firms’ lending rates after the credit crunch means that homeowners are facing the biggest jump in fixed-rate mortgage costs.

Monthly payments agreed in October on 2-year fixed-rate, £150,000 loans were almost £200 higher than in 2005. The trend in 2-year fixed rates previously had been downwards. For instance, monthly repayments fell by £32 between October 2004 and 2006 and by £47 between 2003 and 2005.

The average rate on 2-year fixed mortgages is now 6.13% against 4.6% in 2005. This is the equivalent of a 33% increase in borrowing costs but family incomes have increased only 8%.

The financial industry is collapsing under the weight of defaulting American loans so banks are increasing borrowing costs to support their earnings.

According to one economist at Deutsche Bank, this is going to be the largest repayment shock on record. When people come to refinance their mortgages they are going to have to pay a lot more than the last time they fixed their mortgage rates.

The economist added that this is a particularly bad time for consumers, confidence has been dented, taxes have increased and people are being pressured into saving for their retirement. Growth in incomes is also weak. It is doubtful that today’s rates will fall quickly. Even the Bank cuts the base rate, it could take a while for mortgage rates to follow.

The US Federal Reserve has since cut three-quarters of a point off American interest rates to deal with the credit crunch but the Bank of England’s Monetary Policy Committee left the interest rate at 5.75% last week.