UK mortgages 'to feel effects from US'

The collapse of the United States sub-prime loan market could result in higher mortgage rates in the UK, a former adviser from the Bank of England has warned.

Professor Willem Buiter, formerly of the Bank's Monetary Policy Committee - the body which sets UK interest rates – told the BBC's Today Programme that UK banks were in crisis because of their exposure to bad loans in the US.

With Britain's various financial institutions reluctant to lend money to one another at their usual rates of interbank interest, he said that the banks were likely to increase mortgage rates as well.

"The extent to which this translates into higher rates being charged to households and mortgages or hire purchase loans or higher loans to businesses in the real economy, that, I think, is an open question," he said.

"The longer it lasts, the more likely it is that all rates from deposit rates to mortgage rates to loan rates will, ultimately, in the private sector get pulled up tothat level."

In the next two weeks, Advantage, a Morgan Stanley backed lending specialist is set to increase its rates on prime buy-to-let mortgage products, as well as on subprime and self-certification mortgages, the Financial Times reports.

A number of providers have also begun tightening their lending criteria.

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