How could the crisis in Greece affect UK mortgage rates?-By Andrew Oxlade

Ask an expert: One reader on Twitter wonders how events in Greece might affect their monthly repayments here

Greece, which has been rocked by protests over austerity measures, is now in its fifth year of recession as its struggles to cut its debts Photo: Reuters

Yes, possibly. It all depends on how much turmoil is created by Greece and its potential exit from the euro.

Arguably, some ripples are already being felt in the mortgage market.

But first, it's important to explain, briefly, how mortgage pricing works. The core model for banks is to take money from savers and it lend to borrowers. But things have grown well beyond that.

Banks can make bigger profits if they also borrow money from each other, and lend that out too. They do this on money markets, where they can buy money with variable rates, linked to Libor, or with fixed rates, linked to swap rates.
These rates are decided by a variety of factors, including the institutions' own confidence in each another and in the financial system as a whole.
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Beyond this, swap rates are affected mostly by the outlook for interest rates in the future, be it the official UK Bank Rate or the future cost of government borrowing, known as gilt yields (this cost influences borrowing costs in the whole economy).
Now, back to the question of Greece. If a mass default causes contagion and panic spreads, it could lead to a repeat of the credit crunch and financial crisis of 2007 to 2009. In this scenario, gilt yields and money market rates would spike higher, and this would mean higher rates on new mortgages, and even increase pressure on banks to increase standard variable rates.

However, if the Greek fallout is enough to rattle markets but without causing contagion, it could, perversely, makes gilt yields - and therefore mortgage costs - fall.
This is because the UK has come to be seen as a relatively safe place to park money in uncertain times: a safe-haven.
There could also be a fresh splurge of cheap loans from the Funding for Lending Scheme (FLS), if the British mortgage market needs it.
David Hollingworth of broker London & Country said: "The Funding for Lending Scheme was introduced in 2012 to counter the tightening of lending conditions in the UK brought about by the eurozone crisis.
"Its introduction provided UK lenders with access to funds that provided a buffer against the uncertainty of the crisis and the rising cost of funds that was pushing rates up."
The chart above shows the pattern for two-year swap rates. Despite the Bank Rate being frozen throughout the timespan, the rate has been falling. This is because over that period, the chances of a rate rise has continued to diminish while the FLS and other stimulus measures have helped push it down further.
The prospect of a recovering British economy has seen the rate increase in recent months but the Greece crisis, along with other concerns, has helped cap that rise.
These rates also affect the pricing of savings rates, which have been improving in recent weeks.

Culled from The Telegraph