SHARP increases in mortgage costs of up to £3,000 a year now appear almost certain for tens of thousands of homeowners after the near-collapse of one of the world's biggest banks.
The largest group under threat are the 1.4 million mortgage holders whose fixed-rate loans are due to come to an end over the next few months.
With international money markets virtually frozen after the crisis affecting the US bank Bear Sterns, mo
rtgage lenders – themselves struggling to borrow from other banks – are now less likely to accept homeowners moving off cheap deals as new customers.
That means borrowers are likely to be stuck on the standard variable rates offered by their existing lenders, which are up to 3% above what they are currently paying.
As each quarter-point rise in interest rates on an interest-only mortgage translates to an additional £21 a month, the bill for an average £100,000 mortgage could in the worst-case scenario rise by almost £3,000 a year.
The six million homeowners on standard variable rates are unlikely to escape financial pain either, even if UK interest rates are cut again in the near future.
They will reap little benefit, as mortgage lenders struggling to raise funds to cover the costs of the loans they make are now more likely to keep their own mortgage rates high to protect profit margins.
That will increase pressure on homeowners and families already feeling the financial pinch from higher utility bills, rising taxes and soaring food prices.
Financial experts said yesterday the ripple effect of the decision by New York-based Bear Sterns to seek emergency funds from the US Federal Reserve to prop up its operations were likely to spread across the Atlantic to the UK.
Peter Spencer, economic adviser to the Ernst and Young Item Club, said the global credit crunch was now entering a second, dangerous phase as the international money markets were effectively frozen following the Bear Stearns crisis.
"This will have a definite impact on British households," he said. "Mortgage lenders here were, until recently, raising around a quarter of their funds from international markets. These are now frozen, as we can see from what happened to Bear Sterns.
"Quite simply, this means banks will not want to lend out money as freely as they have done in the past.
"We are seeing the effects with a vengeance. House prices are falling, mortgage approvals have dropped and even those with good credit ratings who can borrow are having to do so more expensively."
Ray Boulger, mortgages expert with broker Charcol, added: "There has already been a loss of confidence in the mortgage market and Bear Sterns will be a further negative factor. The worry is how many other banks may find themselves in the same position."
Last week the Bank of England left borrowing costs at 5.25% after two quarter-point rate cuts since last summer.
GRIM PRICE WE WILL ALL PAY
ANALYSIS: Teresa HunterSit down and make yourself comfortable before reading further, because you are in for a nasty shock. Your mortgage costs are set to rise by anything around £3,000, your cheap credit card will be cut up and your overdraft will sting, because credit markets have effectively closed.
That's only the half of it. Your house price may fall, your job could become less secure, and the value of your pension and endowments will collapse.
The grim truth is we have been living beyond our means for years and are about to pay a terrible price. New home loans in the UK last year grew by £100bn, of which £108bn was raised on global money markets via mortgage bonds and other packages. Britain didn't have the money to pay for them.
After the bail-out of Bear Stearns, this market, already badly hit by the credit crunch, effectively shut up shop.
If you are among the 1.5 million home owners who need to remortgage over coming months, you will struggle hard to find a new deal at anything like what you are currently paying. In all likelihood, new banks won't want you, and you will be stuck on your existing lender's variable rate, potentially 3% higher or more than your current deal. This will cost £100,000 borrowers £3,000 more annually than they are paying.
High-risk borrowers with big loans, high multiples, and who find themselves with low or negative equity because of falling prices, face even more draconian punishments. Many will fall by the wayside.
Even solvent families will have to pay more. Banks have already widened their profit margin by 0.75% compared to last summer.
It could be months before the mortgage bond market starts functioning normally, by which time lenders here will have increased their margins by a further 1-1.2%, typically adding £2,000 to the annual cost of a £100,000 loan compared with only a few months ago.
But the pain won't stop there. Unemployment is climbing. Big redundancies are expected to be confirmed shortly at Northern Rock, and thousands of jobs in the financial sector now look almost as vulnerable as the 1,500 London staff of Bear Stearns.
As we struggle to pay our debts, consumer spending will crumble, hitting industry hard, but particularly banks and businesses associated with property and retail. Share prices are facing torrid days, slashing all our pensions.
Other bills are soaring. From next month, many pay packets will fall because of tax changes in last week's budget, while the cost of petrol, gas and electricity are rising much faster than wages.
The only light on the horizon is that the Bank of England will cut interest sooner, but this may be of limited help.
The full article contains 968 words and appears in Scotland On Sunday newspaper.
