Concerned customers are urged to calm down

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Could the problems affecting Northern Rock spread to other banks and building societies? That was the question on the minds of millions of homeowners on Friday.

The British Bankers’ Association moved swiftly to allay the fears of mortgage customers and savers. “Everyone should calm down and refrain from making simplistic comments in a very complex area which just cause unnecessary worry and concern,” it said reprovingly.

Banks typically fund their loans to borrowers in two ways: by taking deposits from savers, and by borrowing themselves in financial markets. Northern Rock has been unusually dependent on wholesale funds. Only 28 per cent of its funds are from deposits. The strategy has left it particularly vulnerable to the credit squeeze.

But even customers with banks less exposed than Northern Rock may not escape the fallout.

“Those lenders that are dependent on the financial markets are under the greatest funding pressure, and that is where the risk of mortgage rates going up is at its greatest,” said Sue Anderson of the Council of Mortgage Lenders. “Most banks will get through this short period of difficulty, but we need an end in sight.”

Most existing borrowers will be unaffected, at least for the time being, because more than 80 per cent of mortgages are at fixed rates.

Vicky Redwood, of the consultancy Capital Economics, said: “So far, the banks seem to have changed rates on new borrowing only – not on outstanding borrowing. And even within new borrowing, tracker mortgages account for only 15 per cent or so of all new mortgages taken out.”

But she gave warning that the “fairly limited” increase in mortgage rates seen so far could be a harbinger of a more widespread rise.

Despite dropping from 6.9 per cent to 6.82 per cent at the end of last week, three-month interbank rates are still more than 1 percentage point above the base rate.

The mortgage market is highly differentiated, and borrowers with a poor credit history are likely to face much tougher terms than they have until recently commanded.

David Miles, of Morgan Stanley, said: “We are seeing a repricing of products to people with different credit standings.”

The upheaval in financial markets does not necessarily mean that everyone faces a higher mortgage rate. For example, the rate at which banks borrow on two-year fixed terms to fund two-year fixed-rate mortgages – the most popular type of mortgage – has fallen from about 6.25 per cent in July to 5.88 per cent.

This is mainly because financial markets no longer believe that the Bank of England will raise interest rates. The result could be a welcome bit of good news for re-mortgaging homeowners: a cheaper, rather than a more expensive, new deal.

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