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Mortgage rates to rise sharply in March but loan size will grow, economist predicts

by: Lana Clements
  • 03/11/2017
  • 0
Mortgage rates to rise sharply in March but loan size will grow, economist predicts
Mortgage rates will jump in spring 2018, following the increase to the Bank of England Base Rate and the end of the Term Funding Scheme (TFS), but homebuyers will still take on bigger loans, a prominent economist has forecast.

 

The average five-year fixed-rate loan will rise by 50 basis points over the next six months, to around 2.4%, from current levels of 1.9%, according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

But he predicted that longer mortgage terms will mean borrowers will be able to take on bigger debts.

Funding costs are set to rise after the Bank of England this week raised the base rate from 0.25% to 0.5%. And next year the TFS scheme will end, which currently allows banks to secure funding for a four-year period at bank rate – on the proviso lending is increased.

The scheme is around 100 basis points cheaper than funding from depositors or wholesale markets, according to Tombs.

 

Rising costs will be passed on

The economist argues that lenders have little scope to absorb a rise in funding costs, amid the current spread between the five-year mortgage rate and the five-year LIBOR swap rate, meaning they will have to pass it on to customers.

But the sums handed to borrowers will not be scaled back because lending terms will instead continue to lengthen, he argued. Tombs believes the average mortgage term could rise by another two years. In turn, this will hold up house prices in 2018.

Lending over 30 years and longer now makes up more than third of borrowing – from less than a fifth in 2010.

Writing in a research note this week, Tombs said:The average five-year fixed-rate mortgage rate will rise by around 50bp over the next six months.

“Mortgage terms, however, will continue to lengthen, ensuring prices stabilise, rather than fall, in 2018.

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