Higher mortgage rates could be on the horizon

Homeowners and buyers could face steeper mortgage rates when the government’s scheme to boost lending finishes at the end of this month.

The Term Funding Scheme was introduced by the Bank of England in the wake of the UK’s Brexit vote in 2016. It was designed to ensure that lenders would pass on the benefit of the base rate cut that followed the referendum.

Under the Scheme, the Bank of England has agreed to lend in excess of £100bn to banks at low rates, so that they could offer competitive lending rates to borrowers. It will certainly have contributed to the rock-bottom mortgage rates that buyers and homeowners have benefited from over the past couple of years.

However, when the Scheme finishes on February 28, there are fears that it could lead to hikes in mortgage costs. If banks and building societies can’t replace the funding as cheaply, they may have to pass on higher costs to their borrowers.

Interest rates could also rise

The end of the Term Funding Scheme isn’t the only threat to current low mortgage rates.

Even though the Bank of England voted to leave the base rate unchanged at 0.5% in February, Mark Carney, the Governor of the Bank of England, warned that it may be necessary to raise interest rates “somewhat earlier and to a somewhat greater extent” than previously thought, to help curb inflation.

Markets have interpreted this to mean that two rate rises could be imminent, with the first potentially happening in May taking the base rate to 0.75%, and the second possibly in November to 1%.

Every cloud…

Even if steeper mortgage costs are just around the corner, it’s not all doom and gloom. There is currently plenty of competition in the mortgage market which means, for the time being at least, rates are still low. Competition has been helped in recent weeks by new lenders such as M&S Bank entering the mortgage market.

If you haven’t reviewed your mortgage recently, you may want to act sooner rather than later so that you can take advantage of current low rates.

Switching to a cheaper deal could potentially save you hundreds, if not thousands of pounds a year, particularly if you are currently paying your lender’s standard variable rate (SVR).

If rising interest rates are a concern, you may want to consider locking into a fixed rate deal so that your mortgage payments won’t change even if rates do go up.