Why are mortgage rates rising after interest rates were cut?
Interest rates were cut to 4.75% in November, the first time they’ve fallen below 5% since May 2023, yet several lenders have raised their fixed mortgage rates following the announcement.
Nationwide Building Society, Santander, TSB, HSBC and Virgin Money Building Society have all announced that their fixed rate mortgage deals will increase this week, raising rates by up to 0.3%. This is because swap rates – key indicators used by lenders to price their fixed-rate mortgages – have crept upwards recently amid fears that interest rates may need to stay higher for longer if inflation ticks up again.
David Hollingworth, associate director at mortgage brokers L&C Mortgages, said: “Most borrowers have continued to fix their rates to benefit from the lower rates they offer when compared with variable rate deals. Counter intuitively those fixed rates have been nudging upwards despite the cut to base rate, as the market perception of the inflation and rate outlook has shifted.
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“The Budget and the US election have added a hint of uncertainty around future rate movements. That has already caused a flurry of price changes to feed through with most resulting in fixed rates being hiked.”
These rate increases can make it difficult for borrowers to decide whether they should lock into a fixed rate now, or hang on in the hope that current uncertainty will ease. Rates are not only increasing, but according to the Moneyfacts UK Mortgage Trends Treasury Report, borrowers have less time to snap up any deal they’re interested in, with the average shelf-life of a mortgage reducing from 21 to 17 days between October and November, suggesting lenders are withdrawing products from sale more quickly.
“Any borrower agonising over whether to take a fixed rate now should reach a decision sooner rather than later,” advised Mr Hollingworth. “There are still some extremely sharp rates on offer with some rates still available below 4% but these are bound to be feeling the pressure. Applying for a deal will secure the rate and avoid any further increases. At the same time they can still review the deal if rates do subsequently drop back.”
What the rate cut means for savers
Rate cuts are bad news for savers, as providers usually trim their savings rates in response. According to Moneyfactscompare.co.uk, the top rate on one-year bonds fell from 4.95% at the start of October to 4.85% at the start of November, while the leading rate on two-year bonds dropped from 4.72% to 4.65%.
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Caitlyn Eastell, spokesperson at Moneyfactscompare, said: “Despite a short but welcome return during October, fixed rate bonds paying 5% or above have yet again disappeared from the market.
“With the Bank of England moving to reduce base rate, it is possible that this decision will impact providers’ pricing strategies, so it is unlikely that we will see them make a comeback.”
Falling rates mean that it’s important to act quickly if you spot a competitive rate Ms Eastell said: “Consumers would be wise to act with haste if they spot an attractive deal, as they may have a shorter shelf-life. Savers who are more open to lesser-known brands, such as challenger banks, will find that typically they offer higher rates of interest.”
Current market-leading bonds include online savings marketplace Raisin’s 9-month bond paying 4.78%, which is provided by National Bank of Egypt UK on a minimum deposit of £10,000, and Kent Reliance Building Society’s one-year Fixed Rate Bond Issue 153 which can be opened with £1,000.