Time to prepare for higher mortgage rates

Since Mark Carney became Governor of the Bank of England, he’s been a strong proponent of the “lower for longer” school of thought when it comes to setting interest rates.

So the fact that he used his recent Mansion House speech to indicate that Base Rate could increase earlier than markets are expecting – quite possibly later this year – suggests it’s pretty much a done deal.

It’s even possible the Minutes of the June Monetary Policy Committee meeting (to be published in a few days’ time) show at least one member voting for a rise already.

Recent figures from the Financial Conduct Authority show some 60% of outstanding balances are on variable rates1 so the accompanying reassurance that “eventual increases in Bank Rate will be gradual and limited” was, well, reassuring.

The same FCA figures show that more than 80% of new mortgage lending is on fixed rates though. Those who’ve already secured one should feel quite pleased, but those still looking could be in for a torrid time.

The immediate market reaction to Governor Carney’s comments was to drive the Sterling exchange rate to a 5-year high and it’s a fair bet that swap rates (essentially the wholesale cost of a fixed rate mortgage) will jump significantly.

That in turn will likely push the cost of mortgages up. Fixed rates have already been increasing and at the time of writing only two providers still offer 5-year rates under 3% (both with hefty fees as well), and it would be no surprise to see that process accelerate.


 1 http://www.fca.org.uk/firms/systems-reporting/mortgage-lending-stats Detailed Tables, table 1.22: interest rate analysis

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