Mortgage rates on the up

Mortgage lenders are increasing the cost of borrowing as the credit crunch forces them to tighten their belts.

Earlier this week Nationwide, the second biggest mortgage lender, revealed it will increase interest rates on its new fixed and tracker rate mortgages.

The building society is increasing the rate on all new fixed rate mortgages by 0.2%, and by 0.51% and 0.57% on tracker rates. Also this week, Alliance & Leicester, Cheltenham & Gloucester and Chelsea Building Society all put their rates up.

In the current market, sudden reprices and withdrawals are extremely common as lenders struggle to maintain a margin. With a lack of funding restricting the amount of lending for many companies, there is also a reluctance to offer the most competitive rates as this would mean more business than they could cope with.

Louise Cuming, head of mortgages at, said Nationwide’s price changes is bad news for buyers as well as borrowers coming to the end of their current deals.

She added: “People heading towards the end of their deals, who might be starting to panic, should stay calm and shop around early.

“Look around five months before the end of your term as there are some good value deals on the market, particularly for those with a good credit record and substantial equity in their homes."

David Hollingworth, mortgage expert at brokerage London & Country, says reprices are happening on a weekly basis, with nearly all lenders having put up rates in reaction to market difficulties.

He said: “Lenders are putting up rates partly because of funding but also because they don’t want to get swamped with lots of business. They are all focusing on quality rather than quantity at the moment, and will continue to change prices if necessary.

“My advice to borrowers is to act quickly if they see a good mortgage for them – products are being withdrawn with just a few hours notice at the moment.”

Are long-term products the answer?

Although the government failed to make any significant announcements in this year’s Budget to help homeowners, Alistair Darling did reiterate his support for long-term fixed products that offer borrowers rate security. Currently, the majority of mortgages have special discount rates for the first two to three years, after which time borrowers either move onto a higher standard variable rate or remortgage onto a new deal.

With over 1.7 million people facing payment shock this year as their fixed rate deals come to an end, the government says long-term mortgages could be the way forward.

Woolwich, which is owned by Barclays Bank, recently launched a 10-year fixed rate. It says that funding for long-term mortgages is cheaper than short-term at the moment, meaning borrowers looking for the most competitive rates should consider fixing for more than the traditional two years.

Andy Gray, head of mortgages for the Woolwich, said: “With over 1.7 million coming off fixed rates this year, and several hundred thousand of these on rates longer than five years, we expect many consumers will want to fix for the long term to avoid short term volatility.”

Long-term fixed rate mortgages do look attractive at the moment rate wise. However, many lenders will only lend to people that have deposits of at least 10%.

Another factor that puts people off committing to a long-term fixed rate is the penalty charge they face if they want to leave the mortgage early.

For example, the Woolwich product charges 6% if you want to pay off the mortgage during the first 10 years.

Hollingworth said: “While some borrowers are attracted by the security of knowing what you will pay each month for the next 10 years, they are also cautious of committing for so long.

“For one, mortgage interest rates might be a lot cheaper in, say, five years time. And if their circumstances change then it’s not easy for them to get a new mortgage.”

Hollingworth says long-term fixed mortgages are best suited to people who are nearing the end of their total mortgage and want a stable rate for the remainder of their term.

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