The global credit crunch is causing many of the top mortgage lenders to raise their standard variable rates and also raise the premium on tracker mortgages.
A Tracker mortgage is a mortgage product which is tied to the base rate. If the base rate changes a tracker mortgage will automatically lead to a change in the interest rate. For example, a tracker mortgage may offer a rate equivalent to the Bank of England’s Base rate plus 1%.
In recent months, many banks have been increasing the margin on tracker mortgages. 10 lenders have increased the margins on tracker mortgages by up to 0.5%. This means for new people taking out mortgages they face less competitive deals. However, it is worth bearing in mind that many mortgage products are becoming less competitive as banks find it more expensive to borrow money. There are even concerns that in 2008, banks will struggle to raise sufficient funds to finance the UK Mortgage market.
Banks lost money over the subprime crisis in US.
Therefore, financial institutions are becoming risk averse. They want to try and avoid lending for mortgages, they now see as risky.
This shortage of funds is pushing up prices of borrowed money.
Therefore, even in the Bank of England cut interest rates, as expected on Thursday, interest rates for home owners may not fall.
Despite tracker mortgages increasing their profit margin they may still offer a better deal than fixed rate mortgages – especially as interest rates are forecast to fall in the coming year.