Home loans to cost more as fixed rates rise

The cost of fixed-rate home loans has started to rise in what could be a forewarning of across-the-board mortgage increases next year.

More than half - 53 per cent - of new home loans are fixed-rate deals and a hike in the cost of funding could have an immediate impact on fragile confidence in the housing market.

The threat of increased borrowing costs also comes at a time of heightened concern over levels of personal debt in the UK. Bank of England figures published last week showed a 14 per cent rise to nearly £10 billion in borrowing during June. On Friday, government figures showed that the number of people going bankrupt had increased to a 10-year record.

Abbey National and Woolwich are among lenders who have withdrawn fixed-rate deals from the market already. Woolwich has also introduced higher rates, and Abbey will announce new deals on Wednesday. Other lenders are watching the market and further changes are expected this week.

The increases in fixed rates, which will not hit borrowers who have already fixed their loan rates, come as the cost of variable-rate mortgages is coming down. This follows the cut last month in the bank base rate to a near 50-year low of 3.5 per cent. But the cost of fixed-rate deals reflects the financial markets' view of longer-term trends in interest rates.

Fixed-rate loans are funded in the wholesale money markets through instruments known as 'swaps'. There were sharp increases in swap rates last week. Matthew Wyles, group development director of Portman building society, said the cost of funding five-year fixed rates had risen 0.3 per cent on Friday. 'It's very rare to see such a radical and sudden movement in swap rates. We'll meet on Monday to decide what we are going to do. I'd be very surprised to see five-year fixes sub-4 per cent within the week.'

Woolwich, now part of Barclays Bank, has already re-priced its fixed-rate deals. The cost of a two-year fix has increased from 3.59 per cent to 3.79 per cent and a five-year deal from 3.99 to 4.39 per cent. A borrower taking out a £100,000 loan with Woolwich this week would pay £516.31, £10.85 a month more than on the previous rate. The five-year deal costs £22.33 a month more, at £549.61. A spokesman for the bank said: 'Long-term fixed-rate pricing has gone up dramatically in the last week and our current rates were unsustainable.'

Last week's increases in wholesale borrowing costs were prompted by renewed optimism over the outlook for the US economy. Eventually, increased economic activity will put pressure on borrowing costs.

Lenders believe that the UK base rate could still fall before beginning to rise, but Nationwide building society economist Alex Bannister said: 'Financial markets have decided that we are in the trough of the interest-rate cycle. They have decided that the next move in interest will be up some time in the middle of next year.'