Mortgages: Lenders raise rates for new customers

[Legal Beagles]

Bradford & Bingley and Abbey announce increase in costs despite the Bank of England yesterday holding interest rates

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[argentarius]

Re: Mortgages: Lenders raise rates for new customers

Apologies before I start to those who find any of the following a bit technical. Feel free to ignore it or to ask questions if I can help explain anything.

I was going to post that I really am fed up of stories with this irrelevant "despite" clause in them, mainly in the Mail but also in other, normally less irrational, newspapers.

But in fact, the article doesn't use that clumsy and inappropriate wording at all, but rather puts the case:

Yesterday, the Bank of England kept interest rates on hold at 5%, but Swap rates, on which fixed rate mortgages are based, have risen by 0.6% over the past few weeks and lenders are passing on these increases to borrowers.

This is the point: variable rate mortgages are funded either from savings accounts (rates on which have not fallen in line with BoE base rate, particularly on fixed rate short-term bonds) or from the wholesale market (and LIBOR rates are currently almost 1% higher than BoE base rate, which represents an increase of around 0.75% on when the BoE base rate was 0.75% higher - in other words, wholesale borrowing costs haven't fallen at all). Fixed rate mortgages are funded in the same way, but with the added factor of a swap transaction which fixes the rate the institution has to pay to match the fixed rate they are going to receive from the borrower - but those rates are also around 6% for 2 year at the moment, which is again 1% higher than BoE base rate.

All in all, the notion that lenders should track BoE base rate with their products is completely wrong, and surprise that mortgage rates behave differently is naive.

The main reason that swap rates (and hence fixed rate mortgages) have increased over the past few weeks is that the inflation outlook has worsened and the belief that the BoE will cut rates significantly later this year and next has diminished. Swap rates are nothing more than an estimate of the behaviour of interest rates over the period of the swap.

[Froggy]

Re: Mortgages: Lenders raise rates for new customers

That is a very good summation, and, to be more simplistic cos I am a little simple, when you see headline rates for mortgages lower than expected, then it is because the bank's economic advisory teams believe that certain economic factors will dicatate what the BofE will do ie lower that base rate. At the moment, mortgage rates are rising in spite of the static BofE base rate/ they are not going to cut the base rate for a few months.