Rising mortgage rates will cause house prices to cool in H2, Capital Economics predicts

Rising mortgage rates will cause house prices to cool in H2, Capital Economics predicts


According to Capital Economics’ housing outlook, increased household cash savings, remote working and rates remaining at record lows for now will strengthen demand in the near term. 

It referred to Zoopla and Rightmove reports which revealed heightened levels of searches during December, as well as reports from the Royal Institution of Chartered Surveyors (RICS) suggesting buyer demand continued to outstrip supply. 

However, with inflation predicted to reach a peak of seven per cent this year, Capital Economics forecast there will be four more rate hikes to curb this taking interest rates to 1.25 per cent. 

The firm predicted this would bring the average rate on newly-drawn mortgages from its current low of 1.5 per cent to 2.4 per cent by the end of the year. 

Andrew Wishart, property economist at Capital Economics, said: “Combined with the large rise in house prices since the pandemic began, that will push up mortgage payments as a share of income to its highest since 2008.” 

However, he noted that house price growth was not yet in its correction phase. 

He added: “Overall, house prices look set to surpass most forecasters’ expectations in the first half of the year, but then as the rising cost of mortgage finance weighs on demand.  

“Our forecast of a five per cent year-on-year rise in prices in Q4 2022 compares to a consensus expectation of 2.5 per cent.” 

Nationwide amends rates in light of base rate decision

Nationwide amends rates in light of base rate decision


This will apply to its fixed and tracker mortgage rates from 1 February. Borrowers who are on applicable products will see new rates of 2.25 per cent for BMR deals and 3.74 per cent for SMR mortgages. 

Additionally, Nationwide has made a raft of rate changes to select products which will be effective from tomorrow. 

These include its two and five-year fixed rate products up to 95 per cent loan to value (LTV) and selected two-year tracker rates up to 85 per cent LTV, which will see rates go up by between 0.05 per cent and 0.20 per cent.  

The mutual’s three-year fixed rates will also no longer match the equivalent two-year fixed rate products as the rates on these products will rise by between 0.05 per cent and 0.45 per cent. 

For first-time buyers, the five-year fixed rate at 60 per cent LTV, the two-year fixed rate at 85 per cent LTV and the two-year tracker at 80 per cent LTV have all increased by 0.05 per cent. 

These come with a £999 fee and are now priced at 1.52 per cent, 1.54 per cent and 1.24 per cent respectively. 

The two-year fixed rate for home movers at 75 per cent LTV has increased by 0.05 per cent to 1.54 per cent with a £999 fee. The two-year fixed rate option at 85 per cent LTV with a £999 fee has risen by the same to 1.44 per cent. 

Nationwide is also increasing shared equity mortgage rates by up to 0.10 per cent on five-year fixed rates between 60 and 75 per cent LTV. 

Switcher and additional borrowing rates will also rise by up to 0.45 per cent on selected fixed rate and tracker mortgages. 

Henry Jordan, Nationwide’s director of mortgages, said: “We regularly review our mortgage range and these latest changes to our new business and switcher rates are reflective of the current environment. 

“With swap rates continuing to increase, fixed rates have begun to move upwards and our new rates follow changes made across the mortgage market. We are also increasing our BMR and SMR rates in line with the bank rate rise.” 

He added: “We are announcing these now to give borrowers certainty about what their payments will be from 1 February as well as time to consider switching to one of our fixed or tracker products, all of which are priced the same or lower than our equivalent remortgage rates.” 

Rising inflation could see base rate increase to 40bps early next year – Maddox

Rising inflation could see base rate increase to 40bps early next year  – Maddox


The last time the MPC raised interest rates was in August 2018, when it reached 0.75 per cent. The committee voted unanimously to maintain the BoE Quantitative Easing (QE) programme of asset purchases, which will result in buying £875bn government bonds, along with £20bn of corporate bonds. 

UK GDP increased in Q3 2021, although slower than predicted due to supply chain disruption. However, it’s on track to return to pre-Covid levels in Q1 2022.  

The BoE revised down its expectations for UK GDP for Q4 2021 by around 0.5 per cent since the November report, leaving the economy around 1.5 per cent off its pre-Covid level.  

Inflation rose to 5.1 per cent last month, hitting a decade high.  

Bank of England governor Andrew Bailey commented that rising gas prices, driven by tensions between Russia and Ukraine, will push UK inflation to six per cent in the next few months – the highest level in 30 years.  

The latest Office for National Statistics (ONS) unemployment figures continue to see a stable outlook with another slight decrease down to 4.2 per cent in the three months to October. However, we remain to see whether this continues now that the government’s Coronavirus Job Retention Scheme has ended.  

The BoE said it now expected Britain’s unemployment rate to fall to around four per cent before the end of this year, much lower than the November report projection of 4.5 per cent. UK employers have suffered staff shortages this year as Brexit compounds the loss of migrant workers caused by the pandemic last year. 


  Forecast in rates 
Effective rate  One month time  Three months’ time  Six months’ time  12 months’ time  Two years’ time  Three years’ time 
Bank of England base rate*  0.250   0.395   0.699   1.044   0.990   0.829  
Two-year fixed rate**  0.609   0.623   0.917   1.145   1.120   0.953  
Three-year fixed rate**  0.979   1.059   1.121   1.151   1.035   0.894  
Five-year fixed rate**  1.020   1.064   1.092   1.085   0.968   0.854  
10-year fixed rate**  0.966   0.987   0.995   0.973   0.884   0.804  

* Using OIS Curve [rounded to five basis points (bps)] 

**Based on the swap curve 


Markets expect the BoE base rate to increase to around 40bps in early 2022 and then increase over the next year in line with the implied path. 

Market participants also expect two and three-year swap rates to increase steadily over the next year. Rates are anticipated to drop back down slightly in two and three years’ time.  

While the five and ten-year swap rates have been slowly increasing, rates are set to remain quite flat over the next three years. 


UK securitisation market 

While the primary market remains quiet as we enter the holiday season, in 2021, just under £13.5bn of UK residential mortgage backed securities (RMBS) paper has been placed into the market compared to £13bn last year – and £20.7bn in 2019.

Levels remain lower than pre-Covid due to the continued low amount of prime issuance into the market. 


Significant increases in swap rates are already impacting mortgages – Skipton BS

Significant increases in swap rates are already impacting mortgages – Skipton BS


On Skipton’s latest podcast in association with Mortgage Solutions, when asked how the mutual would make sure its pricing was suitable for first-time buyers in light of external factors such as increasing house prices and rates, Bradley said: “We’re definitely dusting off our procedure manuals for that, we haven’t seen a base rate rise since summer 2018.  

“Some of our colleagues have never even seen a base rate rise so that’s quite an interesting dynamic for them. So, we’re working through what a potential rise would mean for Skipton and our customers.” 

She added: “We’ve recently been hit with such a significant increase in swap rates which we do expect is largely due to the ongoing speculation around the base rate. It’s definitely having an impact on how competitive we can price our products.  

“Unfortunately, it’s something that we have little to no influence to control.” 

She said Skipton was also considering how this, and subsequent base rate increases, could affect borrowers in the long term as she predicted there would be multiple changes made by the central bank.

Last week, the Bank of England decided to hold the base rate at its record low of 0.1 per cent despite speculation this would go up.

Bradley added that Skipton had no choice but to “follow the bigger lenders” to remain competitive. 

The mutual also confirmed its recent move to raise its lending limit to 95 per cent loan to value (LTV) for new-build properties and widen its loan to income ratio to 4.49 for households earning £40,000 or less and in need of more than 85 per cent LTV.

Listen to our latest podcast [13.13] (for intermediary use only) hosted by commercial editor of Mortgage Solutions and Specialist Lending Solutions, Shekina Tuahene featuring Skipton Building Society’s mortgage product lead Vicky Bradley and senior credit risk analyst Diane Harrison. 

Base rate held at 0.1 per cent

Base rate held at 0.1 per cent


Today’s Monetary Policy Committee (MPC) vote was split seven to two in favour of holding off on a change to the rate.

Governor Andrew Bailey, Ben Broadbent, Jon Cunliffe, Jonathan Haskel, Catherine Mann, Huw Pill and Silvana Tenreyro voted to maintain the rate while Dave Ramsden and Michael Saunders voted to increase the rate to 0.25 per cent.

The next meeting will be held on 16 December.

The market has been preparing for an increase in the base rate to curb rising inflation, which has exceeded the central bank’s two per cent target since May.

In the minutes of the meeting, the committee said it decided the existing stance of monetary policy remained appropriate but said it would be “necessary over the coming months to increase bank rate to return CPI inflation sustainably to the two per cent target”.

Inflation is currently 3.1 per cent but it has been suggested this rise is only temporary. This fuelled theories that the base rate would not increase as sharply or as soon as some expected. 

Despite this, lenders anticipated a change this week by upping the pricing on lower loan to value (LTV) mortgages to maximise margins. This has also been a response to a recent rise in swap rates. 

Andrew Montlake, managing director of Coreco, said: “The money markets have already priced in a potential rate move as inflation starts to bite, but many believe that this is a temporary situation and inflation will start to ease off early next year.”

He also indicated a move in the base rate would likely come during the first quarter of 2022.

“In truth it is a delicate balancing act with the Bank of England keen to avoid anything that might derail a recovery on one side, or hold off too long to be behind the curve on the other leading to faster, sharper rises. Whilst these decisions remain on a knife-edge, one thing we do know is that we should all be preparing for rate rises sooner rather than later,” he added. 

It has been widely predicted that the base rate will rise to 0.25 per cent by next spring, a move away from the assumption that the record low rate of 0.1 per cent would be maintained for some years. 

Last month, Capital Economics revised its prediction to suggest the base rate would reach 0.25 per cent by 2022, before rising to 0.5 per cent by 2023. The market analyst originally stated rates would rise to 0.5 per cent by 2024.

Nathan Emerson, chief executive at Propertymark, said: “It is only a matter of time before the base rate is increased, with many having expected that to come today.   

“When it does, mortgage rates will inevitably increase, but it is important to keep things in perspective, as the cost of borrowing remains low when compared to historic levels. 

A return to pre-pandemic interest rates would still be very low – Marketwatch

A return to pre-pandemic interest rates would still be very low – Marketwatch


Some lenders have already started preparing for this by raising rates on low loan to value (LTV) mortgages and previous sub-one per cent offerings to increase margins. 

In light of this, the Office for Budget Responsibility also predicted mortgage costs could increase by 13 per cent by 2023. 

So this week, Mortgage Solutions is asking: Have client attitudes changed in light of discussions around rising mortgage costs and rates? How are you adjusting your business strategy to prepare clients? 


John Phillips, national operations director at Just Mortgages  

There’s still a healthy number of people looking to move, and a wave of remortgages coming in the next few months.  

The rate rises also need to be taken in context, but while we may not have the sub-one per cent products, rates are unlikely to rise significantly.   

While brokers will discuss with clients the option of long-term fixed rate products, most clients are comfortable with a five-year fixed product. Anything beyond five years can be difficult to predict, as personal circumstances can change a lot in that time.   

Clients may be attracted to the lower rates of a two-year fixed product, but with the forecast rate rises in 2023, most will be better off in the long-term with a five-year fixed.   

As always, understanding the client’s needs, beyond just financial circumstance, is the key for brokers. There will be some that should fix for two years as they are potentially starting a family and will want to move soon, but there are plenty of others that should fix for longer.   

All the Just Mortgages brokers will be having conversations with clients about their financial future, and the potential rate rises will be part of these discussions.   

Good brokers are always looking into the future, and while we can never be totally certain of what it will hold, it is relatively clear that rates won’t drop lower than they are now in the next few years.   

Fixing for five years is certainly a popular decision at the moment, but brokers should always take into account a client’s needs, and never push for a product that’s unsuitable.   


Dominik LipnickiDominik Lipnicki, managing director of Your Mortgage Decisions 

We are seeing more urgency for clients to get a great fixed deal now with many thinking that with the recent increases, this may be as good as it gets.  

We are also seeing more borrowers look at longer term schemes, rather than just being driven by monthly cost.  

The key here is that the Bank of England will not want to do anything that spins the economy into a recession, hence any increases will be measured and low. Even a swift return to the pre-pandemic base rate of 0.75 per cent would still mean very low rates for most. 

It has also changed the mindset of clients who were considering tracker rates or staying on a deal to avoid early repayment charges (ERCs).  

Some are now making that calculation to see if it is worth paying an ERC and locking into a deal, particularly those who believe that rates may well be at three per cent or more in the medium term. Clearly paying an ERC to secure a new fixed rate requires some very serious thinking. 

We are raising the topic of potential rises in costs, as this is key. This means ensuring that clients can afford the mortgage now but also if rates increase in the future. 

Stress rates already cover any potential increases, but we may well see that change if the sort of low rates that we have been used to over the last 13 years are no longer around. 


James McGregor, director of Mesa Financial 

With regards to the business strategy, we have not made too many changes.  

Advice is determined by clients’ personal circumstances, including potential base rate changes. With regards to our clients, now is the time for us to be as proactive as possible.  

It is key to be in constant contact with our existing clients to make sure they are getting the best possible rates for their personal situations. It is also crucial that we educate them about how these market changes normally operate and not to only consider the increase in base rate.  

Most people in the market will currently be on fixed rates and won’t be in a position to act right now. Only a small percentage of the market sit on tracker products.  

People have always been interested in fixing in for a long time. As an adviser, it is our job to make sure people are aware of the consequences that these decisions can have.  

We have found some lenders tempting people with cheaper, long-term fixed rates, but they come with huge early repayment charges that are fixed throughout the full rate. A significant proportion of these people would be forced to break their mortgage.  

For those considering tracker rates, if anything, these have actually now fallen in line to where they should be in the market so they are more attractive.  

To be honest, when there is an increase in rate, we believe it will be quite nominal and may not even bring us back to pre-pandemic levels initially. Even when the base rate was at 0.75 per cent, there were still mortgage interest rates at 0.99 per cent.  

Based on these numbers, interest rates have been high when you consider the banks’ cost of funds since the base rate reduced to 0.10 per cent. But lenders will always reduce their margin when they want market share. 


Improved economic outlook could see base rate rise to 0.25 in a year – Maddox

Improved economic outlook could see base rate rise to 0.25 in a year – Maddox


The committee also voted unanimously for the BoE to maintain the stock of sterling non-financial investment-grade corporate bond purchases at £20bn and held the total volume of quantitative easing (QE) at £895bn overall.  

Global GDP rose sharply in Q2 2021 due to successful vaccination programmes and further easing of restrictions. UK GDP is expected to have risen by five per cent in upcoming results for Q2 2021, four per cent below its pre-pandemic level.  

However, this is stronger than previously estimated. It’s anticipated that UK GDP growth will be slower in Q3 2021 at around two per cent, due to the recent increase in coronavirus cases, but is expected to recover by the end of the year. 

Following a large increase in April and May, once restrictions started to ease, household spending remained broadly flat in June and July – close to pre-pandemic levels. As expected, there was a surge in property transactions in June due to the rush to meet the first phase of the stamp duty holiday deadline on 30 June 2021.  

Inflation rose to 2.5 per cent in June year-on-year, above the MPC’s two per cent sustainable target, higher than expected in May’s report and markets predict it will rise to four per cent in Q4 2021, before falling back closer to the two per cent target.  

The latest Office for National Statistics (ONS) unemployment figures indicate that unemployment has remained relatively stable in recent months and stood at 4.8 per cent in the three months to May 2021. It remains to be seen whether this stability continues with the end of the government Coronavirus Job Retention Scheme (CJRS), at the end of September.   

Latest figures for the CJRS show that there were still 1.9 million employees on furlough, a decrease of around 590,000 from the end of May. 


   Forecast in rates (changes rounded to nearest 0.25 per cent) 
Effective Rate  1mth time  3mth time  6mth time  12mth time  2yrs time  3yrs time 
Bank of England Base Rate*        0.250  0.250  0.250 
2yr Fixed Rate**  0.500  0.500  0.500  0.500  0.750  0.750 
3yr Fixed Rate**  0.500  0.500  0.500  0.500  0.500  0.750 
5yr Fixed Rate**  0.750  0.750  0.750  0.750  0.750  0.750 
10yr Fixed Rate**  0.500  0.750  0.750  0.750  0.750  0.750 

*Using OIS Curve 

**Based on the swap curve 


With the BoE base bate remaining at its record low of 10 basis points (bps), the markets have suggested that the borrowing rate will remain flat over the next six months.  

Still, due to an improved recovery projection of the economy, it’s predicted there will be a rate increase to 25 bps earlier than expected, within the next 12 months.  

The forecast for the base rate in two and three years’ time has also moved, with an expectation that once the rate increases to 25 bps, it will remain flat at this level for the next 24 months. 

In line with a slower than expected increase in the base rate, the two-year swap rate is not likely to rise for up to two years and will then increase to 75 bps.  

The three-year swap rate is expected to remain flat over the next two years and then increase to 75 bps in year three. For five and 10-year swap rates, the long-term rate will likely increase to 75 bps in the short-term, and then remain flat over the next three years. 


UK securitisation market 

The UK RMBS primary markets have slowed down for the summer break, with the last transactions seen in the market towards the end of July. Over the last year, more than £10.7bn of UK RMBS paper has been placed into the market. 


Strong GDP growth indicates slow and steady path for interest rate rises – Maddox

Strong GDP growth indicates slow and steady path for interest rate rises – Maddox


MPC members all also backed maintaining the stock of sterling non-financial investment grade corporate bond purchases at £20 billion, and held total volume of quantitative easing at £895 billion overall. 


Faster-than-expected recovery

Since May’s meeting, growth in gross domestic product (GDP) globally has been stronger than anticipated. The expected level of UK GDP in Q2 2021 is now 1.5 per cent above what was previously predicted.  

June is expected to be about 2.5 per cent below its pre-Covid Q4 2019 level. A faster recovery has been in large part due to consumer-facing services, as restrictions eased from April onwards. 

Twelve-month consumer price index (CPI) inflation rose from 1.5 per cent in April to 2.1 per cent in May, above the MPC’s two per cent target and earlier than predicted. Inflation is expected to rise further and is likely to exceed three per cent for a short period this year, primarily due to developments in energy prices.  

The MPC predicts that there will be a period of strong GDP growth and above-target inflation, after which inflation will fall back in line. 

The latest unemployment figures from the Office for National Statistics indicate that unemployment has dropped slightly in recent months and stood at 4.7 per cent in the three months to April 2021.  

Also, the number of jobs furloughed under the Coronavirus Job Retention Scheme (CJRS) has continued to drop with 3.6 million jobs furloughed in April, dropping to below two million in May and around 50 per cent of those are on a flexible form of furlough. 


Rate predictions 

Forecast in rates (changes rounded to nearest 0.25 per cent) 
Effective Rate  1mth time 3mth time 6mth time 12mth time 2yrs time 3yrs time
Bank of England Base Rate*       



2yr Fixed Rate**        0.250  0.500  0.750 
3yr Fixed Rate**  0.500  0.500  0.500  0.750  0.750  1.000 
5yr Fixed Rate**  0.500  0.500  0.500  0.500  0.750  0.750 
10yr Fixed Rate** 0.500 0.750 0.750 0.750 1.000 1.000

* Using OIS Curve 

**Based on the swap curve 


With the Bank of England Base Rate currently held at its very low, 10 bps level, the markets have suggested that the rate will remain flat over the next year whilst the economy continues to recover and will then start to rise in two years.  

However, this rise is predicted to be slower than previously expected, with the base rate rising to 25 bps then 50 bps in two and three years respectively. 

Forecasts remain wholly unchanged for the two-year and three-year fixed rates staying flat over the next six months before beginning to rise towards the end of this year.  

The two-year fixed rate is set to increase from 25 bps to 50 bps in twelve months and to 75 bps in two years, and the three-year fixed rate to increase to 75 bps in 12 months’ time and then to one per cent in three years. In respect of the five-year rates, it’s expected that the long-term rate will increase to one per cent in two years. 


UK securitisation market 

The UK residential mortgage backed securities (RMBS) primary markets have been a lot more active over the last few weeks with six issuances into the market since mid-May, one from a prime lender and the remainder from the specialist market, including Kensington’s own inaugural green bond, the first Green UK RMBS issuance. 

Year-to-date there have been over £9.7 billion of UK RMBS paper placed into the market. 

BoE holds base rate at 0.1 per cent

BoE holds base rate at 0.1 per cent


This is despite inflation rising above the committee’s two per cent target. In May, CPI inflation increased from 1.5 per cent to 2.1 per cent. 

Inflation is forecast to rise temporarily above target to three per cent due to increases in energy prices. However, in the medium term, inflation is expected to return to around two per cent. 

The MPC predicted UK GDP to recover to pre-pandemic levels this year largely due to the return of consumer-facing services and the easing of restrictions. 

June’s output is expected to be 2.5 per cent below pre-pandemic levels but this was a 1.5 per cent down-revision from the MPC’s prediction last month. 

Alex Maddox, capital markets and digital director at Kensington Mortgages, said: “Everyone is trying to work out if the inflation increase is temporary or here to stay.  

“By keeping rates constant, the MPC is suggesting it’s the former. Economic growth is returning at pace as the economy returns to normal, but the risk of restrictions lasting longer due to the delta variant may well have swayed the MPC to hold off for a little longer.” 

‘BoE will not enter negative territory and instead begin to increase rates in 2022’ – Maddox

‘BoE will not enter negative territory and instead begin to increase rates in 2022’ – Maddox


The BoE also held the total volume of quantitative easing (QE) at £895bn. As expected, given the BoE is ahead of target for its asset purchases programme, the MPC decided to slow down the pace of bond purchases.

In a nutshell, the MPC shifted up its economic outlook given higher consumer spending, the continued progression of the vaccine rollout programme, the low numbers of new COVID cases in the UK and the easing of restrictions on economic activity. Markets expect growth to be stronger than previously anticipated, with unemployment lower than initially forecasted and inflation broadly stable. The recent improvement in the economic and coronavirus outlook strongly suggest that the BoE will not enter negative territory and instead begin to increase rates in 2022, subject to the 2 per cent inflation target being met.

UK GDP fell by 1.5 per cent in Q1 2021, which is less than previously anticipated in the February 2021 report, with March’s GDP growth exceeding expectations at 2.1 per cent. GDP is also expected to rise sharply in Q2 2021 due to the rebound of the economy. However, activity in the quarter is still approximately five per cent below its levels in Q4 2019. The MPC expects 2021 GDP to expand by 7.25 per cent this year – the highest rate in more than 70 years – from February’s estimate at five per cent. This would bring GDP back to its pre-virus levels a quarter earlier than expected. In 2022, the MPC lowers its projection for growth to 5.75 per cent, from its earlier prediction of 7.25 per cent.


Jobless numbers

The latest ONS unemployment figures indicate that unemployment has stabilised in recent months and stood at 4.9 per cent in the three months to February 2021. The two key schemes to support the UK workforce, the Coronavirus Job Retention Scheme (CJRS) and the Self-Employed Income Support Scheme (SEISS), have had further extensions until 30 September 2021, which is likely helping to flatten the curve. The MPC now projects unemployment to peak under 5.5 per cent from February’s estimate of 7.75 per cent. Beyond 2021, the MPC expects the unemployment rate to track below five per cent, landing closer to 4.25 per cent in Q4 2023.


The rates outlook

Forecasts suggest that the two-year and three-year fixed rates will remain flat over the next six months before beginning to rise towards the end of this year. With the two-year fixed rate set to increase from 25 bps to 50 bps in twelve months and 75bps in two years, the three-year fixed rate will increase to 75bps in twelve months and one per cent in three years. Regarding five-year rates, markets expect the long-term rate will increase to one per cent in two years.


UK securitisation market

Primary markets have been very quiet since Easter, with only one deal from Fleet Mortgages. We expect primary volumes to pick up in the next couple of weeks. Due to the lack of paper in the primary market, the secondary market spreads have been tightening week-on-week over the past month.