Home loans increasing

Why are mortgage rates still going up?

Mortgage rates are still going up due to expectations that the Bank of England might not cut borrowing costs as much as expected. 

Higher-than-expected inflation figures at this point, have led to increased forecasts for UK interest rates, prompting lenders to raise the cost of new mortgage deals.

Those considering purchasing their first home or relocating have probably been monitoring the recent rise in mortgage rates closely. In the past few weeks, numerous lenders have increased the interest rates on new fixed mortgage deals, thus making borrowing costlier. Existing homeowners planning to remortgage this year might have anticipated falling rates, not an upward trend.

So, what’s driving this trend?

Borrowing costs are increasing

Mortgage rates typically reflect the actions of the Bank of England, especially changes to its benchmark interest rates, commonly referred to as the base rate. An increase in the base rate makes borrowing costlier. Swap rates, which are essentially agreements to exchange interest rates between parties for a specified duration, have a considerable impact on fixed-rate mortgage agreements. Consequently, as lenders face higher borrowing costs, fixed-rate mortgages tend to increase. With several recent rises in the base rate, mortgage rates have escalated accordingly.

Lenders’ strategies

Lenders are exercising caution in managing their customer base. The recent increases in rates do not reflect a rapid cycle as observed in the previous two years. Rather, lenders are strategically adjusting their rates. Earlier in the year, a mini price war among lenders led to favorable interest rates for borrowers. Nonetheless, these rates have subsequently increased, with lenders adopting a more conservative approach to pricing. For instance, the average interest rate for a two-year fixed deal rose from 5.55% at the end of January to 5.93% more recently.

Lenders don’t want too many customers

Mortgage brokers emphasize that the recent changes do not signify a new cycle of rapidly increasing rates, such as those experienced over the past two years.

Current mortgage rates remain below the peak of last summer and are not escalating as sharply as they did following the mini-budget of 2022. Nevertheless, some borrowers were expecting rates to consistently decrease throughout the year.

Two more key factors have created the current bump in the road.

  • Firstly, the global economic outlook has not been as positive as many would have hoped. The U.S. central bank again said it would keep interest rates unchanged, because the rate of rising prices (inflation) had proved more persistent than expected.
  • Secondly, lenders tend to move in a pack. A mortgage provider wants to set its rates to be competitive, but not too low to be suddenly inundated with custom and unable to cope with the demand.

For home buyers and owners, the financial landscape has shifted slightly; obtaining a mortgage now is somewhat more costly than it was a year ago.

According to Rightmove, the average monthly mortgage payment for a typical first-time buyer’s property, based on a standard five-year fixed, 85% loan-to-value mortgage, has risen to £1,117 from £1,056 the previous year.

Those facing the end of their two-year or, especially, five-year mortgage deals may see their monthly payments increase by hundreds of pounds, as their previous rates could have been below 2%.

Expectations and inflation

Market expectations are crucial. The Bank of England’s Monetary Policy Committee (MPC) affects mortgage rates through its decisions. The MPC recently indicated that rate cuts would not occur as soon or as frequently as once anticipated, due to persistent inflation and other economic considerations. As a result, mortgage rates have been gradually increasing.

To summarize, the escalation in mortgage rates is attributed to several factors, including higher borrowing costs, the conservative tactics of lenders, and the anticipations of the market. It is crucial for prospective homebuyers and current homeowners to keep a vigilant eye on these trends to make well-informed decisions.

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