Credit crunch returns and mortgage costs look set to rise

Prime Minister's office confirms second crunch as Bank of England warns of higher costs on mortgages.

As the Eurozone continues to teeter on the brink of collapse, the Prime Minister’s office has said that we are now entering a second credit crunch.

A spokesperson for David Cameron said that “we are experiencing a credit crunch”. UK banks have been told that they need to prepare for the possible collapse of the Euro.

Meanwhile the Bank of England has warned that, as the cost of borrowing rises due to the debt crisis, some banks are already starting to pass higher costs on to their mortgage customers. We looked at this issue in more detail in this article.

Bank of England calculations show a decline in the profitability of mortgage lending since 2009.

Right now, rates are continuing to fall, although to secure a decent rate, you’ll need a deposit of 10% or more. We looked at some new mortgages on the market earlier this week in this best buy mortgage article. But these may not be around for long.

Rates to rise next year?

The Bank believes mortgage lenders have been “relatively slow” in “updating the price of new mortgages”. But it suggests that the interest rates that lenders charge may go up more dramatically in 2012.

Mortgage lending activity has increased in recent months, although much of that activity has been remortgages on buy-to-let properties. However, the Council of Mortgage Lenders (CML) has warned that lenders could become more restrictive about who they lend to and how much they lend “unless wholesale funding markets improve”.

Any dip is likely to hit the already-depressed property market. The Government has moved to help first-time buyers, and try to kickstart the market. We wrote about its new initiative to use public money to underwrite some borrowing costs in this article.

But the CML also said that any ramifications from the Eurozone crisis are “not yet inevitable”. The next few weeks will prove critical in determining whether that is the case.

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