Yesterday's downgrading of UK banks by the ratings agency Moody's could have a devastating effect on your mortgage rate - as the banks struggle to raise cash in the market.

So why have the banks been humiliated like this, and how will it feed into your monthly mortgage payments?

Downgrade

Seventeen major global banks saw their credit ratings decimated by the credit ratings agency, Moody's last night, following a review of the sector. These included some of the UK's biggest high street brands, including the Lloyds Banking Group (including Halifax), Barclays, Royal Bank of Scotland and HSBC.

Barclays was one of the banks that was clobbered the most, seeing its credit downgraded two notches. After the review, the agency divided the global banks into three tiers. HSBC is in the top tier - which means the ratings agency thinks it has a stable business which is not too exposed to Europe, and can offset losses.


Royal Bank of Scotland is in the bottom tier, which Moody's said meant it had "problems in risk management or have a history of high volatility." It recognised that some banks in this tier had changed their strategy to contain risk, but added: "These transformations are ongoing and their success has yet to be tested."

HSBC and Barclays were both put on a negative watch - which means they will be reviewed again in 12 months.

• Free guide: The secret truth about Lloyds, RBS and Barclays

Why?

The ratings agency was reflecting the impact of the ongoing eurozone crisis, and the resulting increased risks for all 17 banks which operate in the global capital markets. The crisis in the Spanish banking sector is rippling around the world, piling pressure on already troubled banks.

Moody's Global Banking Managing Director Greg Bauer said in the announcement. "All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses..." The downgrade was worldwide, and included a number of US banks.

The impact

The result of the downgrade means that the banks in question will generally be seen as riskier to lend to. In order to attract lending in the money market, therefore, they need to offer better rates to corporate lenders, which means pushing up the mortgage rates for their borrowers. In addition, they have to hold more cash in reserve in order to be seen as less risky, which means they want to lend less - which again pushes up lending rates.

Richard Lloyd, Which? executive director, said:"This announcement will lead to speculation that it will cause a further rise in mortgage rates. For too long banks have taken advantage of the lack of competition on the high-street to increase the interest rates charged on mortgages, loans and overdrafts, with over 1 million consumers seeing their yearly mortgage payments increase by over £300 million with the Standard Variable Rate rises earlier this year. This is why we cautiously welcomed the Chancellor's recent 'funding for lending' scheme. But we want to see strong safeguards in place to ensure that banks pass on this cheap credit to consumers."

Savers

Lloyd added that the downgrade also serves as a reminder for savers, explaining: "The exact impact this credit rating downgrade will have on consumers is uncertain but there are steps people can take to protect their money. People should spread their money across different banks and make sure their cash is in an account covered by the UK compensation scheme, which guarantees savings up to £85,000 per person, per financial institution."

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