More Mortgage Rates Increase!

Five mortgage lenders have hiked interest rates on tracker mortgages. The Northern Rock crisis is making homebuying pricier...

Last week, in Mortgage Rates Rise As Banks Struggle, I warned Fool readers about problems in the UK mortgage market stemming from the global `credit crunch'. Those problems persist and mortgage rates are rising.

That's because the international money markets have all but ground to a halt over fears about banks' exposure to dicey `subprime' mortgage lending in the US. Without the usual enormous inter-bank lending to oil the wheels of the UK mortgage market, more and more lenders are struggling to provide home loans at attractive rates.

Of course, the primary victim of this credit crunch has been Northern Rock. The building-society-turned bank relied on the wholesale money markets to fund three-quarters (75%) of its mortgage lending, with the remaining quarter (25%) coming from its savers. With Northern Rock barely able to fund its daily cash requirements, it has all but ceased lending to new mortgage customers.

This is important because Northern Rock was the largest provider of new mortgages in the first half of this year, providing almost a fifth (19%) of all lending. Hence, its sudden departure from the mortgage arena has left a vacuum which its rivals are striving to fill. Indeed, it could be argued that Northern Rock's effective withdrawal has reduced competition in the mortgage market, which could push up rates yet further.

What's more, although most other lenders aren't as highly exposed to inter-bank lending as Northern Rock, they are still feeling the heat.

Without a very liquid and active market for lending between banks, money-market interest rates have climbed remarkably high. Against this background of market instability, many UK mortgage lenders are finding it difficult to borrow and lend profitably. Hence, last week, the two giants in this field -- Halifax and Abbey -- withdrew, re-priced and re-launched their tracker mortgages. Their new tracker mortgages charge yearly interest rates up to 0.2% higher than previously charged.

Today, Alliance & Leicester -- the UK's ninth-largest lender -- has followed suit, increasing its tracker interest rates by up to 0.2% a year. A&L relies on wholesale lending to fund about half of its mortgage lending, so it's clearly feeling the impact of more expensive inter-bank lending. The bad news is that mortgage re-pricing is likely to continue for as long as tighter credit conditions prevail.

So, even though the Bank of England hasn't raised its base rate since July, variable-rate mortgages are becoming more expensive. This is a fairly unusual event, in response to an exceptional squeeze on banks and other lenders. For the record, here's a list of the five lenders that have increased their tracker rates since last week (in alphabetical order):

Another factor which is making home loans more expensive is a huge increase in the upfront arrangement fees charged by mortgage lenders. The `true' cost of mortgages is being hidden, because lenders are promoting eye-catching rates with huge fees attached. Indeed, these days, it's not unusual to see four-figure fees attached to Best Buy interest rates.

Finally, I suspect that recent events spell the end for the UK's eleven-year housing boom. In addition, the base rate has risen from 3.50% in November 2003 to 5.75% today. This equates to an increase of almost two-thirds (64%) in less than four years. Higher interest rates, arrangement fees, taxes and household bills, together with tighter lending criteria, will pile on the pressure. As hard-pressed homeowners feel the pain of higher repayments, watch the life being choked out of the housing market!

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