Mortgage costs will inevitably rise

Mortgage costs will "inevitably" rise in the next 6 months as a consequence of inter-bank borrowing costs, John Malone of mortgage club PMS says, warning of "major disruption" ahead.

The 3 month London Interbank Offer Rate (LIBOR ), which sets the cost of lending between UK financial institutions, rose to a 20-year high of 6.88% last week which was the biggest gap between it and the base rate of interest since 1998.

The Bank of England kept their base rates at 5.75% last week as it tried to check the credit crunch caused by the collapse of the US sub-prime lending market.

Jim Cunningham, a senior economist at the Council of Mortgage Lenders (CML) said that borrowers whose rates were directly linked to Libor would suffer the most.

"There is an important question on the widening short-term spreads for mortgage lenders and their customers. I know a number of our members have information programmes in place to prepare their customers for the possibility of higher borrowing costs," he said.

"Looking at the end of July there was a Libor margin of 0.23% which has now risen to 0.93% percent so any increase could be as much as the 0.7% difference between them," he said.

Malone of PMS said that lenders who have already been hit by the sub-prime fallout such as db mortgages, which has raised its rates an average 1 percent, and Unity and Infinity, which have suspended parts of their product range, stand to be particularly hard hit.

Gus Parks of Bradford & Bingley subsidiary Mortgage Express said that the bank had funding from a £2 billion mortgage book sale before the current crisis, but could be hit if the low level of demand for mortgage-backed securities continued longer term.

A spokesman for Alliance & Leicester denied that recent increases in its near-prime rate were related to borrowing costs while other major mortgage lending banks such as Barclays, Northern Rock and Abbey have yet to pass comment on the issue.