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Mortgage rates start to rise and 500 products pulled by lenders

‘Financial markets are sending the clearest message in 20 years that mortgage rates are going to rise’ says expert

Richard Reed

Mortgage rates are starting to rise as they catch up with the 0.5% hike in the bank rate – and are likely to continue to increase.

In a clear sign of the times, swap markets used by lenders to hedge against rising interest rates have risen sharply in recent weeks, while lenders have axed 500 mortgage products.

Lenders price fixed-rate mortgages based on how cheaply they can borrow in the swap market – swap rates are typically lower than mortgage rates to provide lenders with a profit.

Unusually, swap rates recently climbed higher than mortgage rates. At one point last month, however, the negative spread between the two rates was at its widest since October 1999.

“Financial markets are sending the clearest message in 20 years that mortgage rates are going to rise,” said Tom Bill, head of UK residential research at Knight Frank.

“Combined with a cost-of-living squeeze, household finances will increasingly come under pressure this year, which will take the edge off extremely high levels of demand. Gravity-defying price growth will begin to cool, helped by steadily rising supply.”

Reduced mortgage availability

Meanwhile data from the latest Moneyfacts UK Mortgage Trends Treasury Report shows that mortgage availability has reduced notably as lenders have condensed and revised their ranges over the past month, seeing both the average two- and five-year fixed rates rise again.

March has begun with a marked reduction in product availability for the second month in a row. There are 518 fewer products for borrowers to choose from now than there were at the start of February – the largest monthly fall in choice since May 2020 during the early stages of the pandemic.

Following the two recent base rate rises, the average two-year tracker rate for all loan-to-values (LTVs) rose by 0.33% month-on-month to 2.03%. This is an increase of 0.45% since December 2021 – outpacing the 0.40% overall increase the Bank of England base rate has experienced over the same period.

The average standard variable rate (SVR) increased by 0.15% to 4.61% this month, the largest single monthly rise on Moneyfacts records, with many providers not yet having amended theirs following the first back-to-back base rate rises since June 2004.

Cost of living crisis

Overall average two- and five-year fixed rates for all LTVs have increased for the fifth consecutive month, rising by 0.21% and 0.17% respectively. At 2.65% the two-year average is the highest Moneyfacts has recorded since November 2015, while the five-year equivalent of 2.88% is the highest since April 2019.

Eleanor Williams, finance expert at Moneyfacts, said: “Borrowers contemplating securing a new mortgage deal may be disheartened to see that rates are continuing to rise this month. Fuelled by uplift across LTV tiers, the overall average two- and five-year fixed rates have both continued their climb.

“As well as selected product withdrawals, we have seen providers revamp their product ranges, with a number pulling whole LTV brackets and in one case temporarily withdrawing their entire range.

“While factors beyond lenders’ control are uncertain, as the cost of living crisis continues and economic conditions are volatile, to mitigate the risk of default, it could be that providers may tighten their lending belts even further.”

The Bank of England’s Monetary Policy Committee is due to consider another possible rate increase on 17 March.

March 9, 2022

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