UK mortgage costs risk heading higher again with BOE rate hikes
UK MORTGAGE rates have started to head higher again, reversing a downward trend as the Bank of England (BOE) signals that it is sticking with its efforts to rein in double-digit inflation.
Property experts warned that mortgage rates risk climbing further, if markets firm up bets on the BOE continuing to hike interest rates to as high as 5 per cent. Investors are betting that the central bank will lift its key lending rate by a quarter point on Thursday (May 11) to 4.5 per cent, continuing the quickest series of increases in four decades.
Some lenders are starting to edge up the price of home loans again, in anticipation of higher BOE rates. This would strain households that are already grappling with a cost-of-living squeeze, and bring fresh headaches for Prime Minister Rishi Sunak, who is trying to restore his government’s popularity ahead of an election likely next year.
“We’ve seen several of the mainstream lenders actually put rates up,” said Andrew Montlake, managing director at broker Coreco. “They do think that, with stubborn inflation and the BOE probably going to put rates up again, that actually swap rates are still staying where they are. They don’t seem to be falling anymore.”
The big six mortgage lenders increased rates slightly on the average two-year fixed-rate mortgage with a 75 per cent loan-to-value ratio, lifting the rate 0.16 percentage points to 4.65 per cent last week, according to Uswitch. On a five-year deal, it rose 0.11 percentage points to 4.21 per cent from the previous week.
Mortgage costs are priced off movements in swap rates, which reflect the market’s expectations for the future path of interest rates at the BOE. In normal times, mortgage costs would rise along with the central bank’s key rate.
A NEWSLETTER FOR YOU
Tuesday, 12 pm
Property Insights
Get an exclusive analysis of real estate and property news in Singapore and beyond.
Lately, mortgages have been falling despite rising BOE rates. That is because mortgages shot up during the panic triggered by Liz Truss’ budget when she was prime minister; they later subsided when the crisis ended.
Now, that trend has petered out, and the cost of borrowing has stabilised. However, stickier wage and price data have spurred bets that the BOE will keep hiking rates throughout the middle of 2023, even as the US Federal Reserve considers a pause in its tightening cycle. And those factors are starting to put upward pressure on the mortgage rate.
Aneisha Beveridge, head of research at estate agent Hamptons International, said: “Generally if the BOE have to hike further than markets currently expect, then there is a stronger chance that mortgage rates will have to rise a little bit to compensate.
“The pace of (mortgage) rate cuts has levelled off. I think that’s widely because it was believed that the BOE was coming towards the end of its hiking cycle.”
Investors are now bracing for a quarter-point increase in the BOE’s key rate on Thursday, and again in either June or August, with a more than 50 per cent chance that rates will peak at 5 per cent in September. That, at the very least, will firm up mortgage rates and may well send them higher.
“I don’t think it would take much of a hawkish shift in market pricing to cause mortgage rates to rise again,” said Andrew Wishart, property market economist at Capital Economics. “The five-year swap rate already looks unusually low given bank rate cuts aren’t yet on the agenda.”
He added that the policy being “even higher for longer at 4.5 per cent could push mortgage rates up from where they are now”.
Some four million owner occupiers face a fresh rise in mortgage rates when they renew their deals in 2023, but borrowing costs have come down from the highs hit late last year. The average two-year fixed-rate deal has fallen from a peak of over 6.5 per cent last October to 5.28 per cent last week, according to Moneyfacts. That is still much higher than the 3 per cent recorded a year ago.
BOE deputy governor Jon Cunliffe said last year that interest rates would have to rise to 5 per cent or higher to cause distress to mortgage borrowers.
Economists are less hawkish about how high UK rates will go. A Bloomberg survey showed that economists expect the BOE to make one final quarter-point rate rise to 4.5 per cent and then leave policy on hold for some time.
“Where things are at the moment, I can’t see rates dropping by a percentage – that’s for sure,” said Nick Mendes, mortgage technical manager at broker John Charcol. “There’s a lot riding into the next few months. That’s going to have a really interesting impact in terms of where rates go.”
Share with us your feedback on BT's products and services
