Banks and building societies are warning borrowers to prepare for interest rates rising to a
two-year high of 1% by the end of the year.

Mortgage rates are likely to rise in line with the Bank of England base rate as lenders pass any
increase on to borrowers.

The bad news was packaged with figures showing mortgage lending has hit rock bottom with
money advanced to borrowers last year showing the lowest total for 10 years.

Gross mortgage lending in December was an estimated £11 billion, according to the Council of
Mortgage Lenders (CML), the trade body for the big mortgage lenders.

The slump in lending was the fourth month in a row mortgage advances were less than the
previous month.

Overall, December’s mortgage advances were 6% less than November.

Year on year, lending was down 18% on the £13.3 billion recorded in December 2009,
although comparisons are distorted as some home buyers brought forward purchases in the
closing months of 2009 to take advantage of the stamp duty concession expiring at the end of
the year.

Lending totalled £34.4 billion in the fourth quarter of 2010, down from £37.9 billion in the
previous quarter and 11% lower than the £38.7 billion for last three months of 2009.

Mortgage payments to go up for homeowners

For 2010, annual lending totalled £136.3 billion – down 5% from £143.3 billion in 2009 and
the lowest annual total since the £119.8 billion advanced in 2000.

The CML suggests rising inflation is increasing the possibility of mortgage rates rising sooner
than expected.

Most indicators show that the UK growth rate can be expected to slow markedly in the first
half of this year, and the CML expects that even if there is a rise, the base rate is unlikely to
exceed 1% by December.

CML economist Peter Charles said: “Money market rates have recently moved higher in
anticipation of a rise in base rate and some lenders have recently reflected these increases
in their product pricing. Against this backdrop, consumer demand may be weaker than we
would otherwise have expected.

“Higher interest rates will also hit the budgets of existing borrowers, although the expected
modest rises in base rate will result in a relatively small proportionate rise in monthly
payments for most mortgage holders.

“Consequently we believe there will be little change in the level of arrears this year, and we do
not anticipate revising our current arrears forecast.”

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