High Cost of Borrowing May Be Legacy of Credit Crunch

Mon, 09 Aug 2010

The three years proceeding the onset of the credit crunch have witnessed the cost of borrowing for households rise in spite of interest rates decreasing to a record low and banks resuming high profitability.

First time buyers and younger people are the ones who are bearing the brunt of the credit crunch, as they are being charged a much higher premium than those who lack sizeable deposits for mortgages .

Countrywide, UK's biggest estate agency, figures show that the most common mortgage customers took out last month had a starting interest rate of 6.49%.

That is nearly six percentage points above the Bank of England's historic low rate of 0.5%.

However, whilst rates have dropped over the last three years the cost of borrowing has quickly headed in the opposite direction.

Personal loans were selling at an interest rate of 6.8% in August 2007, so says Moneyfacts. Presently the best rate is 8.8%, however, only for individuals who have an "excellent" credit record.

Should the borrower have a "fair" credit rating, then the best rate is 53.9%.

The average credit card three years ago charged 16.5%, however, that rate has not been seen since.

Moneyfacts stated that the average credit card now charges 18.6%, with applicants who have only a middling credit record being more likely to be offered rates of 30%-35%.

Moneyfacts state that the margin on five-year fixed rate mortgages from six leading lenders went up from 2.39 points to 3 points in 12 months, increasing the cost of a £200,000 loan by £1,200 a year, making the likelihood of repossessions even more real.

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