Lehman creates 'second credit crunch'

Tuesday, 16 September 2008 12:00

The collapse of the Lehman Brothers could create a second credit crunch with rising interest rates.

Yesterday the Bank of England injected £5 billion into the markets in the form of three-day equity swaps and today the central bank pumped in £20 billion of extra reserves into the markets as a part of its "exceptional fine tuning operation".

The action was deemed necessary as inter-bank Libor interest rates are threatening to rise as institutions look to hold onto their cash - the same problem that led to the run on Northern Rock.

The Bank is taking actions to ensure that the overnight rate is close to bank rate of five per cent.

The upshot for consumers is the recently falling mortgage rates could see a turnaround.

Katie Tucker, technical manager of Mortgage Force, said: "If Libor increases, many lenders with good deals won't be able to sustain them, and will only be able to replenish them with higher rates, so borrowers should act immediately on any rates they are considering."

She added: "Despite a fortnight of gently improving mortgage deals, the lenders are still in a precarious position: many are operating with fewer staff and limited funding, meaning they can get overwhelmed quickly so if one lender has a sweet deal sticking out, they get so many applications that they have to replace it with something less attractive that will let them blend back into the market's flat landscape, like constantly shaking down a bowl of sugar."

However, Ms Tucker does claim there is good news on the mortgage front in the short term.

"Today, Standard Life has improved many of it rates, as has Woolwich, Coventry and Abbey, all by around 0.15 per cent and UCB Homeloans has announced a reduction in rental cover requirements from 125 per cent to 115 per cent of mortgage payment," she said.

"Cheltenham and Gloucester continues to top the tables with its 4.99 per cent choice of fixed or tracker, with 2.5 per cent fee. (Cost for comparison is 7.1 per cent APR)."

Ms Tucker concluded: "The credit rationing is less to do with liquidity now, as lenders can exchange immoveable assets for moveable ones, it is more to do with the actual amount of cash in the pot.

"The banks of the UK will recover only through a diligent process of raising funding through savings and investments, a fact which will benefit savers."

• Tags:
• fixed rate mortgage
,
• news