Mortgage misery as home loan costs hit seven-year high

Last updated at 12:25 07 January 2008

Families are facing mortgage bills more than 20 per cent higher than two years ago as the cost of a typical home loan has hit a seven-year high, figures show today.

The average homeowner is struggling to find an extra £135 per month compared with last year to pay their mortgage, according to Bank of England data.

This extra burden coupled with how far people have stretched themselves on credit cards over Christmas has prompted fears that growing numbers of people will have homes repossessed.

The Bank of England is under increased pressure to cut interest rates for a second month running this week in a bid to reduce the cost of borrowing.

Most economists are predicting a series of cuts in the base rate this year, but some believe the first reduction of 2008 will come next month rather than on Thursday.

But future base rate cuts may not be passed on automatically to borrowers. As banks struggle amid the global financial turmoil, mortgage rates climbed at the end of last year despite the base rate remaining the same.

The evidence of extra financial pressure on families comes as the Church of England launches a campaign to offer practical and spiritual guidance on debt.

The Matter of Life and Debt campaign draws on Bible texts and offers guidance to clergy on giving debt advice from the pulpit.

Meanwhile, business confidence is plummeting amid warnings of a recession, according to a survey.

It is at its lowest level for five years with more than half of firms pessimistic about the future, the Lloyds TSB research found.

A second poll of 600 companies by accountants Grant Thornton found the balance of businesses feeling optimistic about the coming year against those feeling pessimistic is getting worse.

The difference between optimistic and pessimistic firms was just 14 per cent - well down on last year's figure of 43 per cent.

Optimism is much lower than the 22 per cent positive balance recorded in the U.S., where confidence is higher than 2007.

This is despite the fact that the credit crunch is affecting the U.S. much more than the UK.

The surveys come as expectations rise of a cut in interest rates by the Bank of England on Thursday.

Some economists believe the cost of borrowing could be cut for the second consecutive month as figures show further signs of a slowdown in the housing market and wider economy.

Lending figures last week showed that the number of mortgages approved for those moving home fell to a three-year low during November.

Other statistics showed activity levels in the manufacturing sector slumped in December.

Alysoun Stewart of Grant Thornton warned of the danger of British businesses talking themselves into a recession.

"The U.S. is currently experiencing a greater fallout from the credit crunch than the UK, yet businesses there are more confident about the year ahead than we are," she said.

"If the U.S. can be positive about withstanding the effects of the credit crunch, then so can we."

She said UK businesses were feeling gloomy because of the global economic uncertainty, fears over falling consumer spending and the lack of skilled workers.

Across the EU, confidence is more than twice the level of the UK at plus 35 per cent.

Mrs Stewart added: "While no one is suggesting that 2008 is going to be a walk in the park, businesses still need to be cautious that they don't end up talking the country into a recession.

"We need to cast aside our negative attitudes and focus on solutions rather than the problems."

The Lloyds TSB survey of 200 companies found only one in three expressing confidence.

Trevor Williams, chief economist at Lloyds TSB Corporate Markets, called for interest rate cuts in the next few months to restore optimism.

•Alistair Darling is demanding a meeting with energy watchdogs to explain a massive rise in power bills.

German-owned Npower has announced immediate rises of up to 27.1 per cent with more firms likely to follow.

The Chancellor has expressed concern that the increases could threaten economic stability and put the elderly at risk and has asked Ofgem for a report.