Interest Rates
Which way now?
There is some
very worrying news beginning to surface this morning which in turn may lead to
house prices taking a tumble in coming months. Worrying and at the same time
conflicting, earlier in the week, sterling fell to a four month low against the
euro following the announcement by the governor of the
Bank of England that interest rates may have peaked.
In a statement
following a meeting of the monetary committee, the governor, Mr King indicated
that the central bank was in “wait and see” mode regarding official interest
rates. He said it would be prepared to cut rates only if it became clear that
the turmoil in credit markets was markedly damping economic activity and
diluting inflationary pressures. However this statement seems to be at odds with
economists who are predicting
mortgage rates will have to rise because of the effects of the US
housing market crisis. In fact a number of lenders have already raised interest
rates on a selection of their loans, meaning more bleak news for
homeowners.
There has been
much talk in recent months of Uk lenders exposure to US sub prime mortgage
business. Sub prime lending involves higher-interest loans to consumers with
impaired or non-existent credit histories; this sector has been the
fastest-growing part of the mortgage industry. Global markets have been in
turmoil recently as many homeowners to whom these loans were furnished are now
struggling to keep up payments, now it is feared that interest rates will have
to increase to help recoup losses.
This morning news
that Northern Rock has had to borrow money from the Bank of England has sent
shock waves through the market. It is the biggest financial help provided to a
lender in over 30 years. A freeze in the money markets left the Northern
Rock unable to finance itself and following confirmation of the situation by the
Bank of England, shares plunged as much as 26 percent to a six year low after.
The bank will provide an unspecified amount of credit. Northern Rock based in
Newcastle is the third-biggest lender by gross mortgages with loans worth 17.4
billion pounds as of June 30 2007.
This is in deed
worrying news as for while, many have believed that house prices in the United
kingdom have escalated too quickly Lenders seem keen to lend homeowners higher
multiples of money to finance purchasers and many younger borrowers, who have
not seen high interest rates in their own mortgage life time have borrowed money
not expecting interest to increase and certainly not anticipating that UK
interest might have to rise to pay for losses occurring in other parts of the
world.
There is also a
school of thought that this type of borrow represents Britain’s own type of sub
prime lender. There is a great worry that in the coming months many homeowners
will struggle to keep up payment on their home mortgage loans.
The news comes despite yesterday's Bank of England decision to keep the interest
rate on hold this month. Borrowers were hoping to escape the effects of
the recent market turmoils but City experts say UK banks will need to put their
borrowing rates up in order to recoup some of their losses. Global markets
have been on a rollercoaster ride in the past few months with UK markets hit
over fears of their exposure to the US sub-prime mortgage markets. The
sub-prime market consists of borrowers who have a poor credit rating and
therefore are lent money at a higher rate of interest.
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