October 16, 2024 3:49 pm

Insert Lead Generation
Nikka Sulton

The Bank of England is anticipated to reduce its headline lending rate from 5% to 4.75% at the Monetary Policy Committee meeting in November. This potential cut is creating a shift in the mortgage landscape as lenders respond to changing economic conditions.

NatWest has recently joined the ranks of major lenders increasing mortgage rates. On Tuesday, October 15, the bank announced a rise in rates across most of its two-year and five-year fixed and tracker rate mortgage products.

Specifically, the increase will be by 0.3%. This adjustment reflects the ongoing changes in the market as lenders adapt to fluctuating interest rates.

Additionally, the rate on NatWest’s prominent five-year mortgage for buyers with a deposit of at least 40% will exceed 4%, rising from 3.79% to 4.09%. This move indicates the continuing challenges faced by borrowers in the current economic climate.

The rate on NatWest’s five-year fixed mortgage for borrowers with a 25% deposit is set to rise from 3.89% to 4.19%. This increase reflects the broader trend in the mortgage market, where lenders are adjusting rates in response to changing economic conditions. As the Bank of England prepares to meet in November, the anticipation of a cut in the headline lending rate from 5% to 4.75% could create further fluctuations in mortgage rates across various products.

In addition to fixed-rate mortgages, some tracker rates are also experiencing increases. For instance, a two-year tracker deal aimed at purchasers with a 40% deposit will rise from 5.61% to 5.91%. This shift highlights the ongoing adjustments lenders are making to align with current market dynamics and the expectations of potential borrowers.

Santander has recently taken steps that further indicate a tightening mortgage landscape. The bank has decided to remove some of its cheapest fixed-rate deals, which may suggest that the rising gilt yields are beginning to affect the cost of home loans. This decision by Santander underscores the challenges borrowers may face as lending conditions evolve.

Last week, Santander announced it would “temporarily” shelve eight residential and remortgage deals, all of which were for five-year fixed terms. This move reflects a strategic response to market conditions, as lenders assess the implications of rising costs and seek to manage risk effectively.

As the mortgage market continues to react to economic changes, borrowers should remain vigilant about the rates offered by various lenders. With the prospect of further adjustments in the coming weeks, understanding the implications of these rate changes is essential for anyone looking to secure a mortgage or refinance an existing loan.

The recent reversal in mortgage rates follows months of decline and coincides with a significant increase in yields on gilts, which are used to price fixed-rate mortgages. Currently, the benchmark ten-year gilt is trading at a yield of 4.242%, up nearly half a percentage point since mid-September. This rise in bond yields has raised concerns in the market, particularly regarding a potential increase in borrowing outlined in the upcoming Budget, which may heighten the risk for investors regarding repayment.

This shift in rates presents a setback for the property market, which had begun to show signs of recovery as mortgage rates were falling. The availability of sub-4% mortgage rates had helped stimulate activity in the sector, making it more accessible for potential buyers. 

The growing uncertainty in the financial markets, coupled with rising gilt yields, creates an unpredictable environment for both borrowers and lenders. This situation highlights the delicate balance between borrowing costs and market confidence, which is crucial for the health of the property market.

As lenders adjust their rates in response to these developments, prospective homebuyers may face challenges in securing favourable terms. The recent trends serve as a reminder of how quickly the lending landscape can change, impacting buyers’ decisions and overall market dynamics.

With this volatility, it remains to be seen how the property market will react in the coming weeks, particularly as the Budget approaches and investors assess the implications of government borrowing on the housing sector.

The Bank of England is still anticipated to reduce its headline lending rate from 5% to 4.75% during the Monetary Policy Committee meeting in November.

 

Which mortgage rates have increased?

In addition to Santander and NatWest, several other lenders are taking a cautious approach. Coventry Building Society has announced increases to many of its fixed-rate deals, and some specialist lenders, like Aldermore, are following suit.

At present, two- and five-year fixed rates can be found below 4%. The most competitive offer is a five-year fix from Coventry Building Society at 3.69%. 

Brokers have reported that smaller lenders, including Bank of Ireland and Kensington Mortgages, are also withdrawing deals this week. 

Aaron Strutt from Trinity Financial noted that lenders typically hesitate to lower rates but are quick to raise them when funding costs change.

 

Why have mortgage rates gone up?

Lenders are on edge due to unsettling signals about potential “tough decisions” from Labour. 

For months, mortgage borrowing rates have been decreasing as swap rates—the primary mechanism for pricing fixed mortgages—have also fallen. However, rising concerns ahead of the Autumn Budget, coupled with fears of persistent inflation, slow interest rate cuts, and global tensions, have caused borrowing costs to increase.

David Hollingworth, associate director at L&C Mortgages, stated, “The mortgage market has seen rates drop recently, but this trend may soon reverse. Fixed-rate pricing is influenced by market expectations regarding interest rates, and uncertainty surrounding the upcoming Budget, alongside mixed signals from the Bank of England and global unrest, is driving costs up for lenders.

“Swap rates are a reliable indicator of fixed-rate pricing trends, and they have risen again. If this continues, any improvements in fixed rates will likely come to a sudden stop and may start to increase.”

 

When could they be brought down?

The situation remains uncertain, largely hinging on the announcements made during the upcoming Budget and the Bank of England’s meeting in November.

In September, the Bank of England held interest rates steady at 5 per cent, but another cut is anticipated later this year. The previous rate of 5.25 per cent was the highest seen in 16 years.

Currently, inflation has significantly decreased from its peak of 11.1 per cent in October 2022. The Consumer Price Index (CPI) rose slightly to 2.2 per cent for the year ending July 2024 and maintained the same level in August, indicating that prices are increasing at a much slower pace than in 2022 and 2023.

However, many analysts expect the Bank to reduce rates at its next meeting on November 7. While UK inflation briefly met the Bank’s target of 2 per cent in May and June 2024, it is projected to remain slightly above that target for the remainder of the year before decreasing in early 2025.

In May, the International Monetary Fund (IMF) recommended that UK interest rates be lowered to 3.5 per cent by the end of 2025. However, in its latest forecast in July, the IMF cautioned that persistent inflation in the UK and the US might necessitate keeping interest rates “higher for even longer.”

 

 

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