Borrowers feel the squeeze

BUYING a home became more expensive last week as the chaos on the money markets rumbled on. Not only will monthly repayments rise for many borrowers but we could see the emergence of mortgage queues, with young borrowers hit particularly hard.

Northern Rock became the latest victim last Thursday when its funding sources dried up. It was forced to plead for emergency money from the Bank of England, which is charging it the punitive rate of 1% over base rate. Its borrowers should brace themselves for more expensive deals as a result when their current offer comes to an end.

Other institutions have already hiked costs. Abbey, Halifax, BM Solutions and Standard Life have increased tracker loans by up to 0.2%, adding up to £12 per month to the cost of a £100,000 mortgage. Bank of Scotland is up 0.1%.

But more pain is on the way as lenders batten down the hatches and reassess how they have been pricing risk in the light of the current crisis. The Leeds Building Society has already tightened its lending criteria by pulling out of the 100% mortgage market, unless a borrower can provide a guarantor.

Leeds operation director Peter Hill said: "House prices are falling in some areas, so 100% mortgages are now higher risk for both lender and borrower."

Alliance & Leicester has increased by 0.79% what it charges borrowers who self-certify their earnings to avoid salary checks, also seen as higher-risk lending.

And this might only be the beginning. Director-general of the Building Societies Association, Adrian Coles, suggested that borrowers could find themselves paying different rates depending on their risk profile.

He said: "We could reach the stage, as with credit cards, that you see an advert quoting a particular rate, but when you ring up, that's not the rate you're offered."

Some lenders are reporting a flood of applications as brokers push through business before deals are pulled, and for fear that finance will dry up and mortgage queues reappear.

Norwich & Peterborough chief executive Matthew Bullock said: "We are seeing extraordinarily high volumes of applications. It's as though lenders who are still 'open for business' are being inundated, because borrowers are concerned next week's deals will be more expensive. This is pushing up prices in itself, as lenders attempt to keep things flowing smoothly."

Skipton chief executive John Goodfellow predicted more borrowers might be asked to pay a higher lending charge, which can add thousands of pounds to the cost of a loan and hits young borrowers particularly hard, who often require high income multiples with a small deposit.

Goodfellow suggested: "Whereas typically some lenders levy the charge for loans with a deposit of less than 5%, we might see borrowers with less than a 20% deposit having to pay one."

Charcol's Ray Boulger said owners of unusual properties may face new headaches trying to remortgage. He said: "When funding has been tight in the past, lenders start boycotting different kinds of properties, such as former council flats or flats over shops. Others, such as thatched, wattle-and-daub or converted lighthouses can also be problematic and cost more."

The days of limitless cash swilling round markets, looking for borrowers is over. Goodfellow argued: "Some of the lending which has gone on has been crazy. Lenders are going to look very carefully in future at applications involving high income multiples, but they will also want to see equity in the property."

Punter Southall Financial Management's mortgage principal John Postlethwaite said: "Applications which would have gone through routinely a month ago will start coming back rejected. I've got a couple of troublesome cases myself at the moment."

Lenders said the primary reason for price rises is the soaring cost of money on the wholesale markets as liquidity dries up. The three-month Libor rate, which is the interest banks pay when they borrow from each other, at one point hit 6.9%, up from 6.28% a month ago.

This is now significantly higher than swap rates on which fixed mortgage deals are priced. Two-year swaps are currently around 5.99% and three-year swaps 5.7%, down from 6.22% a month ago, as the consensus grows that the next rate move will be down.

Another vulnerable group will be the nearly three million borrowers coming off fixed rates and other special deals in the months to come. Not only may rates have climbed by anything up to 50% since they took out their loan, but their creditworthiness may be revisited in a new light, given the current tightening.

A particularly toxic combination will be no or low equity in the property with high income multiples, and their plight will be worse if the borrower has taken on other debts as well. If they have certified their earnings, then this too could cost them more, or they may find it more difficult to switch to a new lender.

While these borrowers will have been warned at the outset that they could face bigger repayments when they come off their special deal, the scale of any likely increase is likely to have been seriously underestimated.

Best deals currently on offer

It is vital when picking a new deal to examine the overall costs rather than just the headline interest rate. Your cheapest option will depend on the size of your loan and arrangement fees.

For example, the Abbey's cheapest headline tracker is now its two-year deal offered via brokers at 5.69%. However, it offers 12 trackers, all with different features and arrangement fees. Its highest tracker rate is now 6.19%.

According to Moneyfacts, if you have a £100,000 mortgage your best two-year fixed deal is the Britannia's 6.29% mortgage, which will cost £15,891. The best two-year discount is Bank of Ireland's 5.99% rate, costing £15,448.

Britannia is also best for fixes over three and five years, costing £23,572 and £39,098 respectively. Darlington Building Society tops the three and five-year discounts, costing £23,000 and £38,284.

For a £200,000 mortgage, Britannia is still the best, with fixes costing £46,284 over three years and £76,546 over five. With discounts, Saffron comes top over two years at £30.334, Catholic over three at £45,110 and Norwich & Peterborough over five at £75,751.