Mortgage pain rises as squeeze intensifies

By Christina Fincher

LONDON (Reuters) - The cost of taking out a new fixed-rate mortgage surged last month, highlighting the downward pressure on house prices and the rising burden on consumer wallets.

Figures from the Bank of England on Wednesday showed the typical rate on a new two-year, 75 percent loan-to-value fixed mortgage rose 37 basis points in June to 6.63 percent.

This was the highest rate since February 2000 and explains why mortgage approvals have tumbled in recent months. Approvals for new mortgages have fallen by half in a year while house prices have dropped around 8 percent in as many months.

The tighter credit conditions will not be lost on Bank policymakers who began a two-day meeting on Wednesday to decide interest rates.

Since the start of December, the central bank has cut official interest rates by 75 basis points to 5.0 percent. But rates on new fixed-rate mortgages have jumped by more than 50 basis points as lenders have moved to restore their margins and rebuild battered balance sheets.

At the height of the housing boom, lenders were scrambling over themselves to lend money. Since the credit crunch hit last summer, their own funding costs have leapt and their willingness to lend has evaporated.

"The credit channel seems to be drying up," said Peter Newland at Lehman Brothers.

The Bank looks almost certain to keep rates steady this week but Newland said he expected a cut before the end of the year.