Tue, June 17 2008

Interest rates on fixed-rate mortgages are at their highest in a decade.

Last week, a dozen lenders raised rates across a range of loans and from today, Nationwide, which is the UK’s second-largest mortgage lender behind Halifax, will charge new borrowers up to 0.5% more for fixed-rate and tracker mortgages.

According to financial website, Moneyfacts, interest on the average two-year fixed-rate mortgage now stands at a 10-year high of 6.75%.

The interest charged on fixed-rate loans is determined by money market swap rates and these have been spiralling steadily, despite the Bank of England’s base rate remaining at 5% since April.

Money market rates for lenders funding a range of fixed-rate deals have increased by up to 0.44% since mid-May.

Further rate rises are expected across the UK mortgage sector because traders set swap rates according to their forecasts for interest rates during the period of the fix.

Today’s news that inflation increased to 3.3% in May will compound matters because it suggests the likelihood of rises in the base rate this year.

The cost of the average five-year fix is only slightly lower than the two-year, at 6.72% and the most competitive fixed-rate deals are available only to those who are looking for a 75% loan-to-value ratio.

In 2006, interest on the two-year fixed-rate loan stood at around 4.5% and homeowners coming to the end of their deals this summer are faced with a substantial payment shock.

SOURCE: financemarkets.co.uk