The first rise in Bank Rate could be just months away. How will mortgage rates react, and what should borrowers do?
Mortgage borrowers have been rattled by fears that their interest rate may rise following indications from the Bank of England that the first increase in the official cost of borrowing is only months away. This is becoming a concern for current property owners and first timers, it is also a concern for self-builders who already have to consider structural warranties on new buildings before their mortgage is issued.
The rate at which lenders can access money to lend is the key to what they charge you. They usually get this money either from savers’ deposits or by borrowing from other banks on the money markets.
For fixed-rate mortgages, which are more popular when the cost of borrowing is about to rise, the key rate that determines what banks pay for their funds is called the “swap” rate. Swap rates react to expectations of future interest rates and inflation.
The other major factor is competition for mortgage business. Lenders have been competing fiercely to attract customers in order to meet their lending targets and this has helped to keep mortgage rates at record lows for much of the year.
It’s slightly different for tracker mortgages, which are less popular at the moment. Here, the key wholesale rate is “Libor”, which is currently a little above Bank Rate.
Barclays has increased the rate on its popular five-year mortgage from 2.39pc to 2.59pc. It also increased the rate on its market-leading 10-year loan from 2.99pc to 3.25pc.
Santander withdrew its popular 2.19pc five-year fix and increased the cost of a range of other deals, including two-year fixes, although only by 0.1 of a percentage point.
But amid these price rises other lenders, such as HSBC and Coventry, cut their rates last week in a bid to attract customers.