Mortgage rates are likely to edge upwards later in 2017 and into next year – even if the Bank of England keeps Britain’s base rate on hold, brokers have warned.
The Bank’s monetary policy committee voted by a majority of eight to one to maintain the Bank Rate at 0.25 per cent yet again today, marking eight years exactly since rates fell to to their previous record low of 0.5 per cent.
But because most banks and building societies price their mortgages based on their ‘cost of funds’, mortgage rates are not directly linked to the current base rate in the majority of cases.
Over the past two weeks these funding costs have been rising, and with the US Federal Reserve hiking rates by 0.25 per cent yesterday, there are fears they will continue to drift upwards.
The cost of a mortgage depends largely on a mixture of the rates paid by the lender on savings to retail depositors, the returns demanded on private money and so-called ‘swap rates’.
Pricing can also be linked to competition – in order to win more customers, a lender may be prepared to make less money on each loan, keeping mortgage rates lower.
A big influence, however, is swap rates. These determine the rate of interest that lenders pay to access money from other investors – and they have been rising for the past two weeks as markets anticipated yesterday’s decision from the Fed.
Inflation in the UK is rising, with the latest figures showing the CPI rate rose by 1.8 per cent in the year to January 2017, compared with a 1.6 per cent rise in the year to December 2016.
This is nearing the Bank of England’s target of 2 per cent inflation, which if exceeded, would normally trigger a hike in the base rate.
However, the Bank of England’s governor Mark Carney has remained firm that interest rates are likely to stay on hold, despite the Bank’s prediction that CPI will hit 2.7 per cent later this year.
UK economists also don’t believe the Bank of England will raise rates any time soon.
Samuel Tombs, of Pantheon Macroeconomics, said: ‘Wage growth weakened sharply in January, despite a further decline in labour market slack. Unemployment has been driven down by rising self-employment; employee numbers are flat. The latest data vindicate the Monetary Policy Committee’s view that rates can remain on hold for a prolonged period.’
In practice, mortgage rates are probably likely to stay very low for borrowers looking to remortgage with a lot of equity in their homes and for those who want to buy with a big deposit.
Equally, borrowers with good credit scores and steady full-time employment are likely to find rates stay competitive.
Where rates might start to rise first, is for those with smaller deposits, variable incomes such as the self-employed, adverse credit in their past or for those who need to borrow a slightly higher multiple of their annual income to afford their home.
Simon Gammon, of mortgage brokers Knight Frank Finance, said he is seeing more borrowers choose longer term rates to protect themselves for Brexit.
‘Rather than being tied-in for two years on a deal with the most competitive rate, borrowers are instead opting to pay a slightly higher interest rate on their loan in return for the option to switch out of the deal should the macro-economic conditions change,’ he explained.
‘Other borrowers are taking a different tack in an effort to mitigate the economic uncertainty – by choosing longer-term fixed-rate loans. There has been a shift from two-year fixes to five-year fixes, as customers both take advantage of the fact that mortgage rates are unlikely to fall much lower, and that the economic turbulence which might be coming will have passed by the time they come to remortgage in 2022.’
There are still five-year fixed-rate deals available on the market at under 2 per cent, but swap rates, the money-market rates which determine fixed-rate pricing, are creeping up, so this may not be the case for long.
Montlake added: ‘There is still too much uncertainty in the economy for the UK to see rate rises in the very near future, but there is a growing believe that this time is edging closer.
‘Those borrowers who need certainty and protection against rate rises should be reviewing their options to take advantage of the current crop of low rates sooner rather than later.’
The US Fed is expected to announce a further two hikes in its interest rate later this year.