Mortgage interest rates: Up, up, away!

Up, up and away! But this time, it isn't a hit song or a fairy tale, au contraire, it feels like a bit of a horror story. This is perhaps the only way to describe what is happening with mortgage interest rates, and therefore, monthly mortgage payments for many.

Exactly how much have rates increased by so far?

Residential mortgage lending has seen a trebling of rates, from 1% in 2021, to c. 3.5% today. A second phenomenon is that there previously used to be a considerable difference in interest rates based on what proportion of the home one owned, but that does not seem to matter as much these days, pricing is converging across LTV bands save for 90%+ segment.

So, somewhat perversely, if you own a substantial part of your home (say 40% or more), your interest rates have gone up the most in the past 8 months.

And what part of this might be driven by the Bank of England?

Well, over the same period, the central bank has raised rates every six weeks, starting December last year. A combined increase of 1.65% over the last 8 odd months. One can safely describe this as Bank of England-driven, led by a desire to tame inflation.

Ok, what explains the rest?

Swap rates are thought to be a major driver of mortgage pricing in the market.

Think of them as the rates which mortgage lenders pay to other financial institutions to fix their own cost of funding. This has grown for a 10 year swap from 1% to nearly 2.5% over the same period - an increase of 1.5%.

Are mortgage lenders really that reliant on getting this protection to hedge their own interest rate risk?

Large commercial banks have retail deposits, savings and current account balances to fund these mortgages, but they do have to worry about how stable these deposits are, and therefore buy protection to some degree from financial markets. What proportion of their lending is protected differs for each bank, but its likely that most lenders will have bought some protection.

More importantly, where will interest rates go from here?

Our crystal ball gazing makes us believe rates will go up further over the next couple of years before stabilising.

Inflation is unlikely to be tamed in the short term due to external factors - a war that isn't showing any signs of ending, energy prices are massively up, supply chains are disrupted and China - the world's factory - is playing hardball with the rest of the world. But the Bank of England is worried about what this might do to long term inflation and therefore will continue to fight it by raising the bank rate further in the forthcoming weeks.

Volatility in swap markets is also unlikely to reduce; this is also due to the same issues referenced earlier.

This is a good place to be for commercial banks. By and large, banks make more money in higher rate environments (a high tide lifts all boats), so its in their interest to 'go with the flow'. Grabbing mortgage market share needs lots of funding, so we are unlikely to see idiosyncratic behaviour from individual lenders.

Even if growth suffers as a result of higher rates, there is unlikely to be a reversal in base rates unless inflation is truly under control. The Bank of England will, as will the rest of us, be looking for the Government to do something about growth through fiscal actions.

In summary, the hot air balloon ride is not yet over...

What should you be doing about it?

1. Review expenses - it pays to know where you are spending your hard-earned cash, and what can be cut back. Be comprehensive, start with the big things first, but the little things add up too.
2. Explore remortgages early - it is after all your biggest monthly cost and will greatly help to lock in to a rate asap - up to 6 months in advance. So don't wait to hear from your broker or bank, explore your options straight away, visit here --> https://mortgagekart.com/prelim/best-residential-remortgage
3. Sign up to Mortgage Alert - Even if your mortgage deal is not ending anytime soon, sign up to our free Mortgage Alert service, which will ensure you are always on top of your mortgage. Here is the link --> https://mortgagekart.com/save-on-my-mortgage