Banks have begun withdrawing their cheapest mortgage deals from the market as interest rates are due to rise and increase the cost of home loans.
The City expects the Bank of England (BoE) to raise interest rates from their historic low of 0.1pc next month or the following, with base rates forecast to reach 1pc by August of next year. Financial experts believe the hit would increase the annual cost of the nation’s mortgages by £14bn, a move which would shrink the economy amid a probable slowdown caused by Covid and supply chain crises.
While one-third of the UK’s £1.6 trillion of mortgages are variable deals or trackers and will be hit straight away, the rest are fixed rate and won’t be affected immediately.
Laurie Suter, Head of Personal Finance at AJ Bell, says mortgage interest rates have been at rock-bottom for so long that many homeowners have never experienced higher rates and any rise will come as a nasty shock. And lenders aren’t slow to pass on rate rises. Increasing mortgage interest by 0.5pc adds around £50 per month to the cost of a £200,000, 25-year mortgage, or about £120 per month to a £450,000, 25-year mortgage.
At the weekend, BoE governor Andrew Bailey dropped the clearest hint yet that interest rates will have to rise to drive down inflation. Banks are already moving quickly behind closed doors.
End of era of low interest rates
Barclays has adjusted some fixed rate deals and Nationwide BS confirmed it is ‘reviewing’ its mortgage pricing. Lloyds, the owner of Halifax and the UK’s largest mortgage lender, has also increased the cost of some fixed rate deals. The lenders announced these moves to mortgage brokers but did not issue a more formal statement.
The City is pricing in rate rises now as inevitable. But brokers note that the lenders are acting well in advance of an actual decision on rates by the BoE.
Mark Harris, CEO of mortgage broker SPF Private Clients, says as Swap rates have risen sharply in the last couple of weeks with five-year Swaps now over 1pc, the cost will have to be passed on to the borrower and he expects to see five-year fixed rates rise accordingly. Barclays, he says, increased its five-year fix at 75pc LTV on Wednesday from 1.21pc to 1.31pc. The lender is also raising its two-year fix at 60pc LTV from 0.86 to 0.91pc.
Eliot Nathan, of mortgage broker John Charcol, believes banks are going to start increasing their fixed rates once the BoE raises the base rate to check inflation as it continues to rise. When the first rate rise occurs, the banks will follow suit and interest rates as low as they are currently may not be seen again.
Squeeze on disposable incomes
For any borrowers on a variable rate, Nathan warns now is the time to secure a fixed rate to ensure the cost of the mortgage does not increase over the next few years.
A hike in interest rates to 1pc would cost an additional £100 per month on a mortgage of £250,000 over 25 years.
There is £1.6tn in outstanding home loans across 13.3m mortgage accounts, making the average loan about £120,000. In London, however, this figure is obviously much higher.
According to one study, British households will be £1,000 worse off next year due to a cost of living squeeze caused by rising energy prices and a shortage of workers. The Resolution Foundation has said higher inflation would reduce the value of workers’ earnings next year, contributing to a hit to the average household income.
City bank analyst Ian Gordon of Investec comments that mortage rates ‘will absolutely rise from here’. The energy crisis will add to inflationary pressures and aggravate the squeeze on household disposable incomes, thereby increasing the upward pressure on mortgage rates and adding to the household pain.