Mortgage Informer

Mortgages are likely to become more expensive again after the rate at which banks lend to each another surged to its highest level since 2001 on the back of the financial crisis.

This rate, the overnight London Interbank Offered Rate – or Libor, jumped from 5.49 per cent to 6.79 per cent following the collapse of Lehman Brothers investment bank.

This is its highest level since February 2001, when it reached 7 per cent, according to the British Banker’s Association (BBA). The BBA said that banks were focusing on keeping their money, amid fears over the health of other financial institutions.

As long as the Libor remains high, banks are unlikely to pass on any interest rate cuts by the Bank of England to homeowners.

The jump in the Libor comes as experts warn that mortgages, personal loans and credit cards will become much harder to obtain in the wake of this week’s turmoil on the world markets. The credit crisis has already brought the era of cheap credit to an end, but the events of the last few days have brought any recent easing of conditions to a shuddering halt.

Experts warned yesterday that borrowers would struggle to find competitive deals as nervous banks and building societies stop lending their money to consumers.

Jonathan Loynes, an economist at Capital Economics, said the collapse of Lehman, one the world’s biggest investment banks, would “prolong the problems” for home owners already struggling with the housing market downturn.

The lack of affordable mortgages during the past year has caused misery for millions of homeowners looking to move or remortgage.

Many have been forced to move onto their lender’s much higher standard variable rate once their initial mortgage deal came to an end, paying hundreds of pounds extra each month in repayments as a result.

Rates had improvement slightly in recent weeks with the average interest rate on a two-year fixed-rate mortgage – the most popular deal taken out by home owners – having dropped from a peak of 7.08 per cent at the beginning of July to 6.39 per cent.

But experts said this week’s events would “not make life easy for anyone” and that the recent cuts to mortgage rates would grind to a halt.

David Hollingworth, of mortgage brokers London & Country, said: “It is safe to assume there will not be any further cuts for the time being. If funding becomes more expensive, the trend could even reverse.”

Katie Tucker, of mortgage brokers Mortgage Force, said: “Despite a fortnight of gently improving mortgage deals, lenders are still in a precarious position. Many are operating with fewer staff and limited funding, meaning they can get overwhelmed quickly.

“So if one lender has a sweet deal sticking out, they get so many applications that they have to replace it with something less attractive. It is likely that rates will now go up.”

Borrowers looking for competitive rates on personal loans and credit cards are also expected to be hit in the coming weeks.

Tim Moss, head of loans at moneysupermarket.com, said: “The credit crisis is deepening.

The tightening of lending criteria across the board has means it is becoming difficult to even get a credit card or a loan, never mind the most competitive rate on a mortgage.”

However, while it is likely that home owners will find it more difficult to get a mortgage than in recent weeks, those that have a substantial deposit should escape unscathed.

A spokesman for the BBA said: “Loans and mortgages are still available for people with good credit records and, in the case of house purchase, they have a deposit.”

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Tags: Mortgage Rates