Mortgage rates 'unlikely to come down'

Mortgage lenders today warned the Government that rates for new borrowers were unlikely to come down despite yesterday's intervention by the Bank of England.

Some of the UK's biggest mortgage lenders, who met the Chancellor today, are understood to have told him that the cost of deals for new borrowers was likely to stay high for the foreseeable future.

But lenders also pledged to do more to help homeowners who get into difficulties keeping up with their mortgage repayments.

The Bank of England this week unveiled a £50 billion scheme to help tackle the problems caused by the credit crunch, under which lenders can swap their riskier mortgage-backed assets for safer Government bonds in a bid to kick-start the crippled money markets.

Lenders welcomed the announcement as an important step to tackling the current funding difficulties they faced, adding that in "due course" it should help to ensure that competitive mortgages are available.

But an industry source said they had warned the Chancellor that it would take some time before this initiative had an impact on mortgage rates.

Mortgage rates are governed by the inter-bank lending rate Libor, which is currently at 5.90%, 90 basis points above the Bank of England base rate, compared with a historical average of just 13 basis points above it.

Lenders will not be able to pass on lower rates to customers until Libor rates come down, and this is expected to take some time.

At the same time lenders are trying to increase their margins in the face of anticipated higher levels of arrears and falling house prices.

The discussions between the Chancellor Alistair Darling, Housing Minister Caroline Flint and key members of the mortgage industry, including Michael Coogan the director general of the Council of Mortgage Lenders (CML), are understood to have focused on what lenders can do to help borrowers who run into problems.

Both the CML and the Finance and Leasing Association agreed to review their voluntary codes on treating customers fairly and to report back to ministers by the end of next month.

The industry trade associations said they would meet with consumer groups as soon as possible to take their views into account.

Lenders also said they would only repossess homes as a last resort, while they would continue to meet all statutory and voluntary commitments on treating customers fairly.

They also said they would look at new voluntary activities, such as strengthening links with debt advisers, providing updated debt information and pro-actively identifying borrowers who were at risk of facing repossession.

The Government also said it would work with the industry to continue to keep under review the effectiveness of the framework for helping borrowers who end up in difficulties.

The meeting, which was also attended by the chief executives of HBOS, Nationwide and Cheltenham & Gloucester, the chief financial officer of Abbey and the director general of the Finance and Leasing Association, also discussed shared equity schemes and moves to help first-time buyers get on to the property ladder.

Speaking after the meeting, Mr Coogan said the main focus of the talks had been helping those who were faced with difficulties as a result of coming to the end of fixed rate mortgages.

He said the most difficult period for "payment shock" would have been last year but customers had been able to manage their finances and arrears were below forecast.

He said: "It's a positive picture but we have to maintain a vigilance to make sure the figures do not worsen."

But he added that despite the Bank of England initiative, in the short term mortgage prices would continue to increase.

"In the short term the trend of increasing prices and products being removed from the market is not going to be reversed.

"As and when the banks start lending to each other the rate for lending will go down and that means that that will start to bring the price down but it is not going to be a dramatic reversal. It's going to be a slow process at best."

Ms Flint said: "We know that some prospective borrowers are facing difficulties at the moment because of the global supply of credit.

"We want to ensure there continues to be stability and fairness in the housing market, and that the support is in place for consumers who may need it right now."

The credit crunch has led to steep increases in mortgage rates, with the cost of two-year fixed rate deals for people with a 5% deposit recently hitting a seven and a half year high, despite falling interest rates.

Lenders are raising their rates to reflect their own higher borrowing costs, and are demanding ever higher deposits from borrowers.

But housing charity Shelter warned that today's initiatives would do nothing to help people who faced having their homes repossessed.

Shelter chief executive Adam Sampson said: "Today's meeting was a real opportunity for the Government and mortgage lenders to come to the rescue of millions of hard pressed homeowners, but yet again they have failed.

"What has been agreed today will do nothing to stop ordinary people from losing their homes or facing repossession.

"In the nine months since the credit crunch began, the Government has bailed out Northern Rock and is now bailing out the banks with billions of pounds of taxpayers money, while ordinary people who are in desperate need continue to struggle to make ends meet."