Are mortgage rates going to rise - again?

You thought it was all over… but mortgage rate increases might not be a thing of the past, just yet. Round after round of rate improvements over recent months have possibly lulled borrowers – and brokers – into a false sense of security. Some lenders have begun to reprice their products upwards – even temporarily - amid unsettled market conditions.

It follows a rise in gilt yields and swap rate in recent days, after comments from the Governor of the Bank of England, where he indicated expectations for larger or more frequent rate reductions. It has come, too, amid continuing geopolitical tensions, particularly concerns about the Middle East conflict.

Various members of the Bank’s Monetary Policy Committee have expressed opposing views, signalling potential caution in future voting behaviour. Markets had been pricing in rate cuts for November and December, but expectations for December have softened slightly, reflecting this uncertainty.

So what does the broker community think?  Do they expect further rises, and is there cause for concern?

“I think there is a very good argument to make that we’ll see the pricing of fixed rate mortgages increase from here,” said Richard Campo (pictured left), head of growth at mortgage and insurance practice Heron Financial. “This is in part driven by money markets increasing in recent weeks - for example, five-year swaps are up about 2% in the last week and 7% in the last month. So, as lenders complete on previous funds they have brought in and go back to market for more, the costs have simply increased so that usually manifests in higher fixed rate mortgages.

“There is also a more subtle dynamic in play that we saw with Coventry Building Society in the last few days – they were the cheapest lender on some products, so were swamped with applications and hence had to pull back. Interestingly, as a building society, they are less susceptible to money market movements, so it was simply the demand for their products which has made them pull back.”

Campo added: “When rates are falling you don’t see this, as the cheapest lender gets undercut before they get overrun with applications. When costs go up, the cheapest lender often has to pull back, mainly to maintain service even before pricing becomes a factor. As the market is much busier than it has been in recent weeks/months it would well be a game of whack-a-mole, trying to pin down the best deal in the coming weeks.”

Does Campo believe that borrowers should fix now?

“Yes - there is never a situation where I ever advocate anyone to wait,” he said. “If rates are falling, great, we can replace the rate/lender as needed. When rates are rising it is a no-brainer. This could be a blip, it could be a trend, but with the looming budget, geopolitical tensions rising, it makes no sense whatsoever to delay applying for a mortgage if you are able to.”

Michelle Lawson (pictured second from left), mortgage adviser and director at Lawson Financial,  acknowledged that the potential impact of oil prices rising due to the Middle East tensions, the conflicting commentary from Bank of England members and concerns about the upcoming budget, were all playing a part.

“None of these add any positivity and the honeymoon period could be over, but the reactions to all of this is the tell-tale indicator,” Lawson said. “Swap rates have increased and there is a mixed bag of lender reaction with some of the more exposed specialist lenders increasing, but with one or two decreasing. The same is in the residential space, so there is currently no clear pattern. Rate rises can also be precautionary for service/business levels. There is no clear pattern at the moment as swaps have dipped a little.”

The autumn budget, on October 30, will be key, believes Lawson – and borrowers should be discouraged from fixing a deal, in her view.

“My advice is still the same, to secure something now, and this is the best worst case scenario in a volatile climate,” she said. “If rates increase you are protected, if rates decrease, most good brokers will change rates where parameters and timescales allow. Borrowers should be aware that some lenders don’t permit this, some make charges to do so and some solicitors are charging to review new offers – however, on the whole, the savings are usually there to justify any costs.”

Lawson had some cautionary advice for the Chancellor.

“Rachel Reeves really needs to be taking on board all the advice she is given although appears to be flippantly ignoring,” she urged. “She seems blinkered on raising cash at all costs without considering the unintended consequences. The potential £100k withdrawal on pensions mooted today will have a far wider concern for those that have financially planned to use pensions to repay their interest only mortgage for instance. She is playing with fire, changing goalposts on peoples retirement and investment planning.”

Read more: Keeping interest rates higher for longer could cause ‘significant hardship’ – says broker firm

What is the mood in the mortgage market?

Gerard Boon (pictured second from right), managing director at Boon Brokers, noted a trepidation within the market around mortgage interest rates,  following movement in swap rates, but he sounded an optimistic note.

“Mortgage lenders are naturally taking a more cautious approach and we should expect a number of them to marginally increase rates in the short-term to retain their profit margins, if swap rates continue to rise,” Boon said. “However, for now, our brokers have reported that many lenders are still reducing their interest rates following Andrew Bailey’s announcement about likely base rate cuts in the near future.

“For now, I do not believe that there is cause for concern regarding significant increases to mortgage interest rates in the UK. If they do increase across the board, I believe they will be marginal and short-lived in the market, based on existing economic data. There will only be cause for concern if the UK’s inflation rate significantly surges in the short-term, perhaps as a result of rising inflation in other countries, which could force the Bank of England to respond by increasing their base rate again. This could result in significant hikes in mortgage interest rates in the short-term.”

He added: “I do not personally believe that brokers should advise mortgage products to their clients based on speculation in the external environment.”

Serena Smith (pictured right), mortgage and protection adviser from Mortgages with Serena, observed that rates would always ebb and flow, following market trends and external factors.

“Slight increases at this time could make a large difference for those higher LTV clients, and if this is to affect them or their affordability, then now would be a mindful time to lock in,” she said, but added: “Market rates, I am sure, will come down as lenders compete for the reduced number of applications that naturally occur towards the end of the year, whilst competing to hit their Q3 targets and stay on track for their year’s overall targets.”