Moneyfacts said lenders were likely to review their propositions, following in the footsteps of HSBC, Barclays, NatWest and Santander in hiking up pricing.
The firm said in late February, when the two-year swap was around 3.33% and the five-year swap was around 3.51%, the lowest priced mortgages offered by major lenders were around 0.29% above the two-year swap.
This has climbed since then, and Chatham Financial has shown that the two-year swap, as of 3 September, was 4.26%, up from 4.06% a month earlier. The five-year swap has also risen over the last month from 4.16% to 4.36%.
Moneyfacts noted that some lenders, such as Family Building Society, had pulled their fixed rate mortgages as a temporary measure. The firm said this was a calmer response than in March, when the conflict in the Middle East began and many lenders withdrew ranges.
The impact of a 0.25% increase on a typical two-year fixed rate mortgage could add around £38 to a borrower’s monthly mortgage repayments – or £456 per year – based on a rate of 5.63% rising to 5.88% on a 25-year-term £250,000 mortgage.
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‘Unwise’ for lenders to price mortgages too low
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “The pricing margins among major lenders are under pressure due to renewed volatility in the swap rate market, so it is somewhat inevitable for them to adjust rates.
“Major lenders, which include HSBC and NatWest, have increased rates since the start of September.”
Springall said the recent uplift in swap rates was beginning to filter into fixed rate mortgage pricing, “with more moves expected in the coming days”.
She said swap rates were “much higher than they were a month ago”, and with lenders needing to look at margins carefully, it would “be unwise to price their deals too low, if the expectations are for interest rates to rise, even if over the short term”.
Springall added: “Mortgage rates are rising due to the escalating military conflict between the US and Iran, reigniting inflationary fears. The UK 10-year gilt yield has also risen further above 5% to an 18-year high recently due to a global bond sell-off, adding further pressure to the wholesale funding costs that underpin fixed mortgage pricing. However, the hit to the mortgage market over recent days pales in comparison to when the conflict in the Middle East began around six months ago, when many lenders pulled fixed rate deals.
“While this alone might still not reassure some borrowers, it is worth noting that the pressure on swap rates over the past six months has not been caused by UK fiscal policy, which is why withdrawals and rate hikes are nowhere near the scale experienced in the aftermath of the ‘mini Budget’ in 2022.”
Borrowers’ ‘hopes dashed’
Springall said any borrowers expecting rates to fall over the next few weeks “have had their hopes dashed”, and the prolonged conflict made a base rate rise more likely.
“However,” Springall added, “this might not happen until November, according to economists”.
She advised that any borrowers looking to remortgage within the next six months seek advice and start the process soon.
