The Bank of England has said that mortgage interest rates could increase next year, as lenders pass on the increased costs of wholesale funding.
housepercentagesigns, With costs continuing to rise, the Bank warned that lenders may start to pass this cost on to borrowers by increasing mortgage rates in order to maintain their profit margins.
The report said: "At the beginning of the financial crisis, when funding costs rose sharply, banks were relatively slow in updating the price of new mortgages and the residual remained negative for around a year.
"This suggests it may be during 2012 that any significant increase in banks' lending rates occurs."
The report added: "While credit availability was reported to have increased slightly in 2011 Q3, particularly for high LTV mortgages, subsequent market intelligence suggests that, as with corporate lending, some banks may be starting to pass on higher funding costs to mortgage customers through higher prices."
Nevertheless, Bank contacts suggest lenders are waiting to see whether funding conditions continue to worsen before making any significant moves in pricing.
The Bank also noted that banks have significantly reduced their reliance on wholesale markets, with the gap between customer loans and deposits dropping £600bn since the credit crisis began.
However, it added: "Market intelligence suggests retail funding costs are being bid up too, as banks attempt to attract more retail deposits and reduce their reliance on wholesale funding. This suggests pass-through will eventually occur." For the latest updates on the stock market, visit Stock Market Today
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