Mortgage lenders have started to hike their record-low interest rates in anticipation of a base rate rise before Christmas.
With September “likely to be the last” month to have seen rates on new mortgages fall, experts are warning borrowers of a “significantly altered” picture due to rising inflation which could trigger a base rate rise.
The Office for Budget Responsibility said it expects inflation to reach 4.4 per cent next year, before dipping back down to 2 per cent by 2024. But it added that since the forecast has closed it thought it might peak at close to 5 per cent.
Bank of England governor Andrew Bailey has already hinted that the base rate of interest, currently 0.1 per cent, could be hiked before the end of the year.
The average rate on new mortgages fell to 1.78 per cent in September, but in October more and more lenders started hiking their rates.
TSB was the latest to announce rate changes on its residential range last week (October 29), as it increased rates by up to 0.40 per cent on its two-year fixed first time buyer mortgage for loan-to-values all the way up to 90 per cent.
“This is likely to be the last set of numbers from the Bank of England where the effective interest rate on new mortgages falls as several lenders, including Barclays, HSBC, NatWest and TSB, have all since raised their pricing in anticipation of a base rate rise next week,” said Mark Harris, chief executive of mortgage broker SPF Private Clients.
“With the Bank of England hinting at a rate rise, and the chancellor in his Budget referring to an average rate of inflation of 4 per cent next year, all signs are that the official rate will rise for the first time since March 2020.”
Harris added whether the base rate rises or not, mortgage rates have already started edging upwards, meaning “the markets have already priced in a rate rise, and possibly two or three more by the end of next year”.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, agreed the market was expecting a base rate change as early as November.
“Inflation in October has altered the picture significantly,” she said. Since September, Coles said “anticipation of imminent Bank of England rate rises has increased the cost [of] borrowing for banks, and that has started to feed into higher interest rates.”
But Coles highlighted that rates, whilst on the rise, were still “near the bottom”.
She continued: “You can still get a five-year fixed rate mortgage, for 60 per cent of the value of your home, for less than 1 per cent, and a two-year fix for 0.89 per cent, so there are still great deals around for remortgagers looking to lock in a low rate.”
Savings gap concerns
Whilst borrowing increased in September, with individuals borrowing £9.5bn of mortgage debt over the month - the highest since June - the Bank of England also logged a drop in household savings to £9.4bn.
Richard Pike, sales and marketing director at lending and savings technology provider Phoebus Software, highlighted how this dip could impact lenders’ affordability calculations.
“It is interesting to see that consumer borrowing increased whilst savings, which had increased during the pandemic, fell slightly,” he said.
“As people return to ‘normal’ practices the difference between what people spend and what they save is likely to increase.
“Rising prices, especially on energy and fuel, will surely make that gap even wider over the coming months.
“Then lenders will have to take a long hard look at affordability calculators and the risk that rising household bills have on overall affordability.”
This month, a number of lenders have been stretching their affordability for certain borrowers to 5.5 times income, from the standard 4.5 times income, hence using up more of the higher income ratio cap assigned to them by the Financial Conduct Authority.
Aldermore for instance has increased its minimum income requirement to £60,000 for borrowers so they can access their 5.5 times loan to income ratio.
Halifax has also stretched affordability on a number of its mortgages.
But with savings down, Pike suggested these lenders could look to bring these loan to income ratios back down in the coming months.
ruby.hinchliffe@ft.com
