Mortgage experts warn the UK could be on the brink of another credit crunch if the spread between Libor and base rate continues to increase, which will raise mortgage prices and constrain gross lending.
The spread between Libor, the rate at which banks lend to each other, and base rate, which has been held at 0.5 per cent since March 2009, has increased stea-dily over the past two months.
Three-month Libor currently stands at 0.98 per cent compared with 0.88 per cent at the end of August.
London & Country head of communications David Hollingworth says: “We have been getting used to the price of products falling in the past few months but there is certainly a bit of pressure on pricing now and rates are starting to go up already. If the spread between Libor and base rate continues to widen, we could see another credit crunch.”
John Charcol senior technical manager Ray Boulger says if money markets tighten, the UK mortgage market may not reach its gross lending forecasts.
The Council of Mortgage Lenders predicts gross lending will reach between £135bn and £140bn this year, rising to £150bn in 2012. The CML says gross lending stood at £101.8bn at the end of September.
Boulger says: “I do not think we will see much of a rate inc-rease in fixed-rate mortgages but tracker rates are likely to increase due to the increasing short-term finance costs. I do not think this would impact on this year’s gross lending figure but the question is what will happen next year. If money markets tighten further, then some of the major players will cut back on their lending and there will be some fall-off of gross lending next year.”
Cicero Consulting director Iain Anderson says: “I agree we are on the verge of another cre-dit crunch. It would be a very good result if the lending market could hold its current level of gross lending in 2012.”