Mortgage rates set to rise as banks price in Carney warning

Bank of England governor Mark Carney’s hint that interest rates could be set to increase “sooner than markets currently expect” has led banks and building societies to begin pricing in a hike this year and signals the end of cheap fixed-rate mortgage deals.

The Monetary Policy Committee has kept the base rate at 0.5 per cent for now, but Legal & General Mortgage Club director Jeremy Duncombe suggested that many banks are already increasing the rates they offer borrowers.

He said: “This means that the historically low mortgage deals now available won’t be around for much longer. The average rate for borrowers on a two-year fixed mortgage is currently 2.68 per cent, compared to 3.67 per cent for the same product 18 months ago.

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Martin Richardson, general manager of business development for Leeds Building Society, agreed, pointing to rising ‘swap’ rates as an indicator that banks are already pricing in a rise in the base rate.

He said: “We have seen swap rates increase by 10-20 basis points so the market is already reacting to the economic data and forward looking statements from the Bank of England.

“In these circumstances, fixed rate mortgages are likely to tick up to reflect the movement in swap rates.”

When Carney made his Mansion House speech last Thursday, two-year swap rates were 1.2 per cent, the following day they rose to 1.35 per cent and this week hit their highest level since May 2012, at 1.38 per cent.

Darren Cook, head of mortgage insight at Moneyfacts Group, said that providers have become very quick to react to moves in money markets.

“There used to be about a 19 day lag time between the money market movement and the movement in average rates,” he noted, “but what we’ve seen lately is that the banks have needed to respond really quickly... meaning there’s not much margin in their rates at the moment.

“Reality has suddenly hit the providers and they’re going to have to make some big decisions on how they price mortgages.”

Some, however, urged caution. Jill Evans, managing director of Accord Mortgages, said it was important to “keep this properly in perspective”, pointing to expectation that the base rate “will steadily increase as the economy continues to strengthen” rather than rise rapidly.

A Halifax spokesperson declined to be drawn into speculation on mortgage rates, stating that the bank constantly monitors rates to ensure its mortgage range is priced in line with the market.

The spokesperson said: “Alongside base rate there are a variety of other factors that also influence mortgage rates that are taken into consideration for both rate increases and decreases.”