Experts Predict All-round Increase of Mortgage Rates

On Monday it was announced that Alliance & Leicester were hiking the cost of its fixed-rate mortgages by up to 0.3 percentage points. Alliance & Leicester, owned by Santander, is going to increase the interest rate of its three-year fix for those with a 25 per cent deposit from 4.19 per cent to 4.49 per cent. It is also important to note that the deal comes with a 1 per cent fee. As a result, a borrower with a £150,000 mortgage will have repay £40 more each month compared to the previous sum. The peculiar thing is that the bank raises the cost of fixed-rate loans while the Bank of England keeps the cost of borrowing at 0.5 per cent. Alliance & Leicester is not the only bank that increases interest rates; the UK’s second largest mortgage lender Abbey is also looking forward to raising its fixed-rates by up to 0.1 per cent. Barclays pulled its popular two-year fixed rates via brokers this week and has yet to replace them. Experts warn that in the recent months the cost of fixed-rate mortgages has already reached the lowest index and will probably start to climb. A rise in yields of Government bonds may result in an increase of swap rates, which are regarded as the wholesale money markets, which banks and building societies use to fund new fixed-rate deals. The knock-on effect will be a rise in the rates that homeowners pay on the high street. At the same time, experts say that a further increase of interest rates will be stopped by the drop of borrowers demand. According to the Council of Mortgage Lenders Mortgage, lending decreased greatly by 9 per cent between March and April. Banks, building societies and other financial institutions lending to homebuyers and remortgage customers decreased by 60 per cent in May 2009 compared to April 2008, with £10.4 billion and £26.1 billion respectively. Specialists emphasize that at the moment there is a frightening tendency: some lenders have increased their fixed rate mortgages over the last week while others have withdrawn popular offers and have not replaced them. Some brokers claim that the increase of interest rates was provoked by an increase of activity in the housing market, given the fact that with the growth of demand the supply of mortgage funds has not risen. In such a case, the move of Alliance & Leicester can be labeled as an act "in response to competitor movements". However, in May both, Abbey and Alliance & Leicester, have relaxed the lending criteria on their most popular home loans by decreasing the minimum deposit required for best fixed-rate deals from 40 per cent to 30 per cent.