Why Some Mortgage Rates Are Going Up And Others Are Going Down

There are thousands of mortgage products on the market. It can be baffling for borrowers. Even more baffling these days is the way that some mortgage rates are going up while other mortgage rates are coming down. Different mortgage types are affected in different ways by various factors.

One of the key mortgage types are fixed rate mortgages, which have a set interest rate for distinct period of time. The time is usually two or three years; some are five years, and they can be even longer. The government has encouraged lenders to provide 25-year fixed rates, but there has proven to be little appetite for these in the market place. Banks base their fixed rate mortgage rate on the bank swap rate (a forecast of future lending rates) and in recent weeks this has been on its way down, enabling providers to lower their fixed rate deals. When a fixed rate mortgage period come to an end the mortgage rate usually reverts to the lender's Standard Variable Rate (SVR).

The SVR is the rate on which a provider bases all the deals for its other mortgage types. The SVR is usually related to the Bank of England's base rate, but this link has become less tangible in recent weeks as other factors have come into play, such as the "credit crunch" which has forced lenders to push up their rates to cover increasing costs they may experience elsewhere. These increases are coming in the form of restricted lending and tightened criteria for most mortgage types, but especially those affecting the sub-prime market. This market is for people who want a mortgage, but may have a poor credit history or variable income which makes them a higher risk for lenders. In general terms, though, a lender's SVR is related to the Bank's base rate: whenever the base rate goes up, mortgage lenders put up their SVR straight away; whenever the base rate goes down the SVR usually follows - a little while later. Of course SVRs are higher than the base rate - high street lenders usually set their SVR around 2% higher than base rate; other lenders - maybe dealing in sub-prime mortgage types - will set their SVR even higher.

Other mortgage types, such as discounts, trackers and capped mortgages, are related to the lenders SVR, but are lower for set periods of time. In that way, these mortgage types, offer lower rates of interest than the SVR.

The money that banks use to service non-fixed mortgage types is based on LIBOR, the London InterBank Offered Rate. This is the rate at which banks lend unsecured money to other banks. Because of the problems with credit in financial markets the LIBOR rate has been going up recently, and this has meant that banks have had to put up the rates of their variable mortgage types, despite the Bank of England's base rate remaining static since July at 5.75%.

Ultimately the consumer pays for everything, and in this case the bill for the problems the banks have created for themselves by less than responsible lending is landing on the doorstep of mortgage holders.

Nick is an author on a variety of property related subjects, which include mortgage rate reviews and detailed analysis of the role mortgage brokers provide in the current climate.

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