Homebuyers face mortgage drought as banks reprice loans

Mortgage experts yesterday warned that the Northern Rock crisis would make it tougher for many people to find affordable home loan finance, as lenders continued to reprice products.

The outlook for the mortgage market has become increasingly confused as lenders react to volatility on the wholesale money markets. Yesterday, Abbey became the latest of several lenders this week to cut the cost of its two-year fixed-rate mortgages, by up to 0.2 percentage points.

The reductions reflect a change in the consensus view about the direction of UK base rates, now expected to remain on hold this year, or even to start falling. This shift has led to a fall in gilt yields, as well as lower rates on the interest-rate swaps market, the primary source of funding for fixed-rate lenders.

While lenders are finding it difficult to raise money for fixed-rate lending in the current market environment, analysts believe there is scope for further cuts. Ray Boulger, of mortgage broker Charcol, said: "More lenders are likely to reprice their fixed rates over the coming weeks."

The cost of variable-rate mortgages, on the other hand, is continuing to rise, despite the expectation of lower base rates. This is because lenders finance this sort of mortgage from inter-bank lending, where the Libor interest rate applies. This rate has been pushed higher over the past month by the credit crisis.

Mr Boulger warned that while this problem has so far only affected new tracker mortgages, which automatically move up and down in line with base rates, many lenders would soon be forced to go further. "I expect to see some lenders raise their standard variable rates, which would affect existing customers."

James Cotton, of London & Country Mortgages added: "There is no doubt there will be people who find it harder to get the lending they want."