Why mortgages will keep getting more expensive

housesOwen Humphreys/PA Wire/Press Association Images

Many thousands of British homeowners have seen hikes in their mortgage rates - which were feeling unfair enough already given that Bank of England interest rates remain at record lows.

However, according to one expert, we haven't seen the half of it. So why are mortgages going to get more expensive?

Growing gulf

This is the fourth year running that the Bank of England rate is at a record low of 0.5%, which is leading many thousands of people to wonder why they are paying so much for their mortgage. In fact, the gap between the Bank of England base rate and the average mortgage rate is now the highest since records began 17 years ago.

Ray Boulger of independent mortgage adviser John Charcol points out that things have got even worse in recent weeks. "Over the last month mortgage rates for new borrowers have continued to rise and a couple of medium sized lenders have increased their SVR," he says.

The problem is down to the fact that the Bank of England rate has now de-coupled from what it costs banks to raise money - because the Eurozone crisis has made it so hard for them to raise cash.

Tit for tat

The problem is that once one lender raises the SVR, it prompts others to do so automatically. No lender wants to be too much cheaper than the competition, just in case they attract too much business. "Until wholesale funding becomes more freely available, demand for mortgages will continue to exceed supply and so the current trend of steadily rising rates has further to go as lenders re-price upwards or pull products to avoid attracting more business than they can process efficiently, or can fund," he says.

So what can you do?

Boulger says now is the time to shop around and see if there's a better deal out there - before it is pulled: "The recent SVR hikes will be a wakeup call to some borrowers whose rate is increasing or who are sitting on an uncompetitive rate, especially if they have plenty of equity. For these borrowers acting quickly to review their situation should be a priority as the spread between Bank Rate / swap rates and mortgage rates continues to widen."

"With such large variations now in lenders' criteria it is more important than ever to consider not only which lender has the best deal but which lenders are actually likely to produce a mortgage offer rather than allowing their computer to say no."
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