Mortgage rates are going up

Mortgage lenders are increasing the price of their fixed deals, with HSBC becoming the latest high-street bank to raise its rates this week.

This is despite the Bank of England cutting its base rate to 4 per cent last month, which was followed by a number of rate cuts from other lenders.

Nationwide increased its rates by up to 0.20 percentage points last week, while Barclays increased rates by up to 0.10 percentage points. HSBC has made a raft of increases across its residential mortgages this week.

Hina Bhudia, partner at brokers Knight Frank Finance, said: “We saw a handful of lenders notch up rates last month, but that’s gathered momentum in the past week.

“Many of the larger high street lenders have raised rates, and when they move others often follow.

“So far, these moves have been by a few tenths of percentage points, but that still amounts to a meaningful uplift in monthly outgoings for borrowers.”

We take a look at what could happen to rates in the next few months and what you should do if your mortgage is coming to an end.

Why are rates rising if the Bank cut the base rate?

Lenders use the Bank’s base rate to help set their own interest rates, so rate cuts typically cause mortgage prices to decrease, while increases can make deals more expensive.

However, since last month’s base rate cut, several major lenders have been putting their rates up and experts say there are a few reasons for this.

For example, bond yields have been rising recently, and this can push up swap rates, which impact fixed mortgage deals.

Swap rates are interest rates that lenders exchange with each other as a way of managing risk.

These reflect the market’s view of which direction interest rates will go, so lenders use them to set their own rates. As a result, higher swap rates can push up mortgage rates.

Inflation has also continued to increase since the last base rate cut, rising to 3.8 per cent in July.

The Bank uses its base rate to help control inflation. If inflation is above the Bank’s 2 per cent target, it may increase its base rate to encourage people to save rather than spend, and vice versa if inflation is low.

Meanwhile, wage growth has been high, which could increase spending, driving up inflation further. The Bank will also be looking at this when deciding whether to cut rates again.

Karen Noye, mortgage expert at wealth manager Quilter, said: “Although the Bank recently lowered its base rate, we are seeing lenders raise mortgage rates again.

“This may seem contradictory, but it reflects the complex forces currently shaping the market. Inflation also came in higher than expected in July, which has unsettled expectations around future rate cuts.

“As a result, swap rates have increased and made borrowing more expensive for banks and building societies.”

David Hollingworth, associate director at L&C Mortgages, added: “Although the base rate was cut, there have been more question marks raised about how much further rates will fall, and, perhaps more importantly, how quickly.

“More cautious tones around the pace of rate cuts means that the cost of funds for lenders when pricing fixed deals has edged up. Consequently, the increase in market rates is feeding through to mortgage deals.”

Although there are still a handful of rates available for sub-4 per cent, the average two year fixed rate is 4.98 per cent, according to Moneyfacts, whilst it sits slightly up at 5.02 per cent for five year deals.

What comes next for rates?

With inflation almost double the Bank’s target and swap rates still high, mortgage experts anticipate rates could keep creeping up in the near future.

But they stressed that things could change if inflation dramatically decreases or other economic circumstances change in the next few weeks.

Ms Noye said: “Looking ahead to the rest of September, we expect continued volatility.

“The next Bank of England decision is due on the 18 September, and while another cut is possible, it is far from certain. Much will depend on how inflation behaves over the coming weeks.

“For homebuyers and those looking to remortgage, this means a period of uncertainty. Rates remain relatively high compared to the historic lows of recent years, and affordability continues to be a challenge, particularly for first-time buyers.”

Nick Mendes of brokers John Charcol added: “Markets had already only priced in one more rate cut this year, and with swaps now broadly steady, we’re unlikely to see any major downward shifts in fixed pricing.

“What’s more likely is some small reductions here and there, followed by repricing upwards again as lenders manage pipeline and service capacity. Hopefully this means a period of relative stability rather than another sustained round of increases.”

Should you fix a rate now, or wait?

If you’re due to remortgage in the next six months or are due to complete on a house purchase, experts advise not waiting around to lock into a deal.

This is because you can typically swap onto a cheaper deal if one comes up before your mortgage term is due to start, but you can’t get back a cheaper deal once it’s gone.

Ms Noye said: “Anyone approaching the end of a fixed deal should consider securing a new rate early to avoid moving onto a more expensive standard variable rate.

“Many lenders allow borrowers to lock in a deal now and switch later if better options become available before completion, which can offer some flexibility in a shifting market.”

Mr Hollingworth added: “As market sentiment plays such a big part, the rest of the year could see more further ups and downs but, currently, securing a rate and then reviewing it before completion is the right approach.”

How to get a cheaper mortgage rate

To get the cheapest mortgage rate, compare a wide range of lenders – don’t settle for the one you’re currently with. You can use a mortgage/remortgage calculator or comparison site to compare a range of deals and find the best one for you.

Consider speaking to a broker to help you find the best rate. These are professionals who often have access to deals you can’t find online yourself, or will have early notice if rates are due to change.

You can also access cheaper rates if you have a lower loan-to-value (LTV). This is the amount you borrow versus the amount you put down as a deposit, or own in cash.

If you are remortgaging, be aware that your LTV can change depending on the lender’s current view of your home’s value. If it thinks the value has gone up, this will lower your LTV, while a down valuation can mean your LTV goes up.

You could consider overpaying some of your mortgage before switching to bring down your house value if you are close to 60 per cent LTV – you can typically access cheaper deals at 60 per cent or less.

If you are applying for a mortgage on your first home, putting down a larger deposit to lower your LTV can open up cheaper mortgage rates.

Emma Graham, director at Hodge Bank, said: “Your deposit size can dramatically affect the rate you’re offered, and the total amount you repay over time.”

Make sure your credit score is in good shape before applying for a mortgage. Lenders view people with a good credit history as lower risk, which can lead to cheaper offers.