Eurozone crisis pushing up mortgage rates

The issues on the eurozone are making life tough for lenders. And that means more expensive mortgages.

The Eurozone has gone into meltdown. Greece’s economy has collapsed, and it now looks set to leave the Euro. Spain’s banks are being downgraded by rating agencies.

And the issues on the continent will be felt here in the UK.

One area where we will likely see an impact is mortgage rates. While bank base rate shows no sign of moving anytime soon, the interest rates we pay on our homeloans look set to increase regardless.

Funding issues

According to the Bank of England, we should all get ready for sharp increases in mortgage costs as a result of continental troubles. In its inflation report, the Bank said:

“In the absence of falls in funding costs, it suggests that some further increase in mortgage rates is likely as banks seek to restore their margins.”

In other words, banks are finding it harder to get enough money to fund their mortgages, and will be passing on that extra cost to borrowers in the form of higher rates.

Bernard Clarke, communications manager for the Council of Mortgage Lenders, highlighted that the crisis has made banks reluctant to lend to each other, making it harder and more expensive to access wholesale funding.

He added: "One way to counter that is to compete for retail deposits, but increased competition there may push up prices too. The combination of these two things is likely to result in higher mortgage costs over a period of time, probably the coming weeks and months.

In fact, there are signs that the Eurozone upheaval is already affecting the cost of buying a home. Mortgage rates across the board have increased since the turn of the year, with significant increases in the last couple of months.

The table below shows the average interest rate in February, compared to today:

So what should borrowers do now?

Nick Cooper, mortgage adviser at lovemoney.com Financial Services, noted that short-term tracker rates will still be attractive to borrowers, given they are not expected to increase much for a couple of years. But it's a gamble: "The trouble is that at the end of those two years you may find that a five-year fixed rate will cost you more than it will cost you now."

Mortgage rates are going up, both in the short term and the long term. If you need to review your mortgage, sitting on your hands may hit you hard in the wallet.

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