As most people know, interest rates have been put up five times during the last year. The decision by the Bank of England on the Sixth of September to hold rates as they were must have come as some relief to many with borrowings, especially those that were already struggling with their mortgage payments. In July inflation figures showed a drop to below two percent easing pressure on the Bank of England to raise interest rates however a rate was still expected this September. So what changed the banks mind?
In short, the bank has played a "wait and see" game. The current worries about sub prime loans from America have not worked its way through the system. People believe that some banks have on there books billions of pounds of bad loans which they could make massive losses on, as the people who have taken out the loans default on payments and even get repossessed. These loans had been thought of a quite safe products backed by property. However it turns out that many US mortgages were sold to people who had no chance of making the payments and are secured against properties that may well be worth less than the houses they are secured against. Currently we are waiting to see which banks hold these loans but they are currently giving nothing away. This may be due to the fact that even the banks don't know how exposed they are to these problems as the loans have been mixed with other investments in complex financial vehicles. All the banks do know is that the people who took out these loans are struggling to meet the payments and are in some cases getting their homes repossessed. Until the banks know who has these loans they are cautious about lending money to each other as the bank lending the money may need it if they get caught with bad investments or they lend it to another bank who then struggle to pay it back. What this has meant is that the cost of borrowing money between banks has risen sharply.
So what does this mean to people who borrow money? Well put simply if a bank who is giving you are mortgage sees the cost of money going up from their source of funds that will mean they have to put up the interest rates for the consumer. Over the last few days many lenders to the general public have put up the interest rates on their products substantially. That coupled with lenders taking a more cautious view to lending, as they don't want the same scenario to unfold here that unfolded in America, means that we the consumers may well face a period of higher borrowing costs and more stringent criteria.
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