THE PANIC at Northern Rock is over, thanks to the Government’s pledge on Monday to guarantee all funds in the bank’s savings accounts. But the difficulties that the bank has faced are an indication of how keenly the effects of a crisis that began in the US are being felt over here. The good news for borrowers is that the Bank of England is likely to be wary of raising interest rates for fear of exacerbating the credit crunch – and as inflation has now fallen below 2 per cent it seems more likely that rates will fall rather than rise. We have also witnessed a change in the way that UK mortgage lenders operate. “The mortgage market has taken a step away from its once controlling hand, the Bank of England, and has the potential to become an untamed beast,” says Louise Cuming, at Moneysupermarket.com .

WHAT IS THE OUTLOOK FOR INTEREST RATES?

“Along with reduced inflation and the slow effect of previous rate rises, the credit crunch is another reason why the bank rate may have reached its peak,” says Katie Tucker, of John Charcol.

As a result, fixed rates are starting to fall. “Swap rates, which dictate the future movement of fixed rates, have plunged in the past couple of weeks,” says Melanie Bien, director of Savills Private Finance. Abbey, Alliance & Leicester and Woolwich have reduced their fixed rates, although Bien points out that, compared with tracker rates, fixes remain relatively expensive. “Plus, as there is a growing feeling that the next interest rate move could be downwards, there are still benefits to be had from sticking with your tracker, so long as you can cope with the fluctuations in your mortgage payments,” Bien says.

BUT I’VE HEARD THAT SOME MORTGAGES ARE BECOMING MORE EXPENSIVE

That’s only true of certain kinds of mortgage. If you have a tracker loan your mortgage rate could rise while problems in the markets persist. “The credit crunch is pushing up the cost of tracker mortgages,” says Jonathan Cornell, of Hamptons Mortgages. “The huge leap in three-month Libor, [the rate at which banks lend to each other] has meant that it is much more expensive for lenders to fund tracker rates.” Libor is usually about 0.1 to 0.2 percentage points above the bank base rate, but at the moment it is a full percentage point higher. As a result some banks, including Abbey, Halifax and Standard Life, have recently raised tracker rates. “This only affects new borrowers, not existing ones,” points out David Hollingworth, of London & Country Mortgages. “And increases have only been in the order of 0.l to 0.2 percentage points.”

WHAT IF I HAVE PAST DEBTS?

If you have a poor credit record, you will also be looking at a higher rate, although only in the short term. “Sub-prime mortgages have become significantly more expensive as worried investors are demanding a much higher return to tempt them into buying these loans,” Cornell says. “But once the size of sub-prime losses in the US filter through the system, investors will realise that the UK mortgage market is in good health and sub-prime rates will fall.”

WILL NORTHERN ROCK’S PROBLEMS SPREAD TO OTHER MORTGAGE LENDERS?

Bien says: “Northern Rock is unique in the extent of its exposure to the money markets, so it is unlikely that we will see another lender of its size in a similar predicament.” However, those banks that rely on financial markets, rather than deposits from savers, to raise funds could find themselves in a difficult position, particularly if the credit crunch persists. “The longer three-month Libor remains at such elevated levels and the supply of money is restricted, the harder it is for lenders to borrow the funds they require,” Bien says.

SO WILL THIS AFFECT BUY-TO-LET LOANS, TOO?

Buy-to-let lenders will be particularly vulnerable to the credit crunch. “Like Northern Rock, many specialist buy-to-let lenders source their mortgage funding from the money markets,” Moore says. “Given current market sentiment, this is harder to secure and more expensively priced.”

Buy-to-let landlords are also likely to be affected by the leap in Libor. “Libor forms the basis of buy-to-let mortgage loans and is more common in the buy-to-let market than the residential market,” says Jonathan Moore, of Mortgages for Business.

WHAT SHOULD I DO IF I HAVE A NORTHERN ROCK MORTGAGE?

Nothing. “If you already have a mortgage with Northern Rock you have nothing to fear,” Hollingworth says. You do not need to remortgage – rates at the bank are not going to rise more than anywhere else. He adds: “Many borrowers will be tied into their product with early repayment charges and to switch away would incur a hefty penalty.” “Northern Rock is extremely unlikely to go bust,” says Cornell, “as it is a profitable, solvent bank whose savers and borrowers are guaranteed by the Bank of England. It is much more likely another bank will buy it.”

Explore Property

• Buying & Selling

• New Homes

• Overseas

• Interiors

• Investment

• Gardens

• Cool In Your Code

• Specials

• First-time buyer

Times recommends

• Second homes: credit crunch casualty or money-spinner?
• How I built my own sliding house
• Top 10 incentives for house buyers