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Mortgage rates 'set to rise'

12/09/2007

Abbey had become the first high-street home-loan provider to raise its mortgage rates in the wake of ongoing turbulence on the world's financial markets.

Interest rates for the lender's tracker mortgages for new customers are being raised by between 0.1 and 0.2 per cent.

Explaining the decision an Abbey spokesperson said: "We often reprice our tracker mortgages and take into account many factors, such as competitor positioning and market pricing."

But in light of the credit crunch that has been prompted by problems in the US housing sector, other UK lenders are expected to follow suit.

Fears that mortgage rates for British homeowners will increase across the board come despite last week's decision by the Bank of England to keep interest rates on hold at 5.75 per cent.

Reports suggest that ongoing problems in the US sub-prime mortgage market, which are responsible for the current turmoil on the stock markets, are now spilling over into the UK's housing sector.

Default levels in the sub-prime sector, which provides home loans to those on low incomes or with poor credit ratings, have been rising in the wake of past interest-rate rises in the US.

Because many of the world's banks are thought to be exposed to bad debts in the sub-prime sector, their liquidity has been compromised and they have been charging higher interest on money that they lend to one another as a result of losses made.

It now seems that homeowners in the UK will also have to pay more for money they have borrowed from the country's banks, which are now thought to be stockpiling funds in order to cover their debt liabilities.

Meanwhile, in his first public comments on the credit crunch, Bank of England governor Mervyn King has said that it is "too soon" to tell to what extent consumers and corporate borrowers will be affected by the crisis.

But in a note submitted to parliament's treasury select committee, he stressed that the current turbulence on the markets should not threaten the UK's long-term economic stability providing the appropriate action was taken by banks.

"The current turmoil, which has at its heart the earlier under-pricing of risk, has disturbed the unusual serenity of recent years," said Mr King in the note, which comes ahead of his planned appearance before the committee next week.

"But managed properly, it should not threaten our long-run economic stability," he added.