How Lehman Brothers fall out will affect UK mortgage market

Michelle Slade, analyst at Moneyfacts.co.uk, comments: "It is not just in America where the fallout from the Lehman Brothers bankruptcy will be felt: it will likely have an impact on the UK mortgage market.

"In the last two months, mortgage rates had finally dropped to pre-credit crunch levels. As liquidity in the money markets eased, lender passed on the cuts in borrowing to consumers.

"At the end of last week, rumours over Lehman Brothers caused the cost of borrowing on the money markets to increase. Now that it has been confirmed, the cost will likely increase further as once again the banks may become wary about lending to each other. The increase in borrowing for the banks will likely be passed on to the consumer through higher mortgage rates.

"The longer the banks face an increased cost of borrowing, the more likely it is that UK mortgage customers will be hit. It usually takes around two weeks for any increase to filter through to mortgage rates and only then will we be able to for certain see what impact Lehman Bros has had on the UK mortgage market.

"The Bank of England has put £5bn into the money markets to ease pressure, but previously when the Bank injected funds into the market, it was oversubscribed and did little to stop them seizing up.

"It's not all bad news though. Last time the markets seized up, lenders looked to their savings books to help fund their mortgages. Moneyfacts saw some of the highest rates seen for many years, certainly the highest rates ever offered when base rate was at the current level of 5%."