Homeowners face mortgage shock

Hundreds of thousands of UK homeowners could pay more for their mortgages during 2008 even though the Bank of England is expected to cut interest rates to at least 5.50%.

Around 1.4m will come to the end of cheap fixed rates over the next 12 months. While failing rates for new mortgage borrowers, analysts warn many will see a leap in repayments as the credit crunch fallout continues.

The Bank of England cut rates by a quarter point to 5.5%  last month and many economists predict another 0.25 percentage point reduction either in January or February, with at least one more decrease later on in the year.

Some believe rates will fall even lower: investment banks HSBC Credit Suisse and First Boston forecast Bank rate at 4.50% by the end of 2008, while Capital Economics, a consultancy thinks it will be more closer to 4.25% during 2008.

Despite this, some mortgage providers plan to raise the cost of loans for new borrowers in the new year as they are struggling to raise funds because of the crisis that has hit financial markets.

The three-month Libor, the rate at which banks lend to one another, is usually similar to Bank rate, but for the past few months it has been running at more than 6%.

Cheltenham & Gloucester is increasing the rate on its tracker deals for new customers. Its two-year deal with a £1,995 fee is going up by 0.15 points from 0.03% above Bank rate, to 0.18 points above. This takes the pay rate from 5.53% to 5.68%. Analysts expect more mortgage lenders to follow its lead in the next few months.

It is still possible to get a good rate, though, and borrowers are being urged to move quickly to snap up the best deals.
First Direct has a two-year fix at 4.99%, with a £1,498 fee. This is available for loans up to 80% of the property’s value.
The next-best deal is from Skipton building society at 5.49%.

It is available at 5.49%. It is available up to 95% and has a £1,599 fee. Both deals offer free valuations and legal work for remortgages.

If you would prefer a variable-rate mortgage a tracker is a better option than a discount. Once you are locked into a tracker you are guaranteed to benefit fully from any rate cuts – C&G’s rate hicke only affects new borrowers.