U.K. Banks Are Hiking Mortgage Costs Ahead of BOE Rate Decision
U.K. Banks Are Hiking Mortgage Costs Ahead of BOE Rate Decision
(Bloomberg) -- U.K. high street banks have started raising mortgage costs ahead of the Bank of England’s interest-rate decision next week amid signs of resurgent inflation.
Barclays Plc is increasing a 2-year fixed rate by 0.35 percentage point, which follows similar moves by lenders including HSBC Holdings Plc, NatWest Plc and Lloyds Banking Group Plc.
The increase in borrowing costs threatens a further squeeze on millions of workers, with inflation already on track to jump above 4% and tax rises planned for middle and higher- income households.
Markets expect the BOE to increase its benchmark rate to 0.25% from 0.1% on Nov. 4, and to 1% by the middle of next year, with Wednesday’s inflationary budget raising the chances of a move.
Several economists brought forward their forecasts for the first increase since the pandemic after Chancellor of the Exchequer Rishi Sunak unveiled a budget stimulus worth 75 billion pounds ($103 trillion) in the coming years.
Office for Budget Responsibility projections suggest wages will struggle to keep pace with prices, causing disposable incomes to stagnate. However, lenders are lifting rates at a time when overall mortgage costs at record lows, held down by competitive pressures.
BOE data Thursday showed that the average rate on the U.K.’s 1.6 trillion-pound stock of mortgages dropped to a historic low of 2.01% in September, after the effective interest rate on new mortgages dropped to 1.78% from 1.82% in August.
The cost, which the BOE described as “the actual interest rate paid, was last lower in September 2020 -- six months after the central bank lowered its benchmark rate to 0.1% in the pandemic.
Richard Campo, managing director of London-based mortgage broker Rose Capital Partners, said the spike in rates began last week, before the budget.
“It was actually the employment/wage data that caused the shift,” he said.
In the past week, Barclays increased its 2-year fixed rate from 1.56% to 1.91% at 85% loan-to-value. Halifax, part of Lloyds Banking Group, raised its 5-year fixed rate from 1.16% to 1.41% at 75% LTV.
With higher deposits, borrowers can still obtain sub-1% rates but mortgage broker Magni expects them to be “withdrawn imminently.”
“For savvy homeowners, now is the time to fix,” said Martijn van der Heijden, chief financial officer at Habito, a mortgage broker. Variable-rate borrowers will see loan payments “shoot up by hundreds of pounds a year” even if the BOE raises rates by as little as 0.25%.
Martin Lewis, a consumer finance expert, opened his ITV show last week by asking “is the door about to shut on uber-cheap mortgages?” He said he was issuing a “clarion call” to everyone with a mortgage to check they were on the cheapest rate before the BOE acts.
Activity in the U.K. mortgage market was well above pre-pandemic levels again in September as buyers rushed to take advantage of a temporary tax break before it was fully withdrawn in October.
Mortgage approvals for house purchases totalled 72,645 in September, above the 71,000 economists had forecast. Individuals borrowed 9.5 billion pounds of mortgage debt, the highest since June 2021, when the relief was scaled back.
To stimulate the housing market, Sunak scrapped stamp duty on the first 500,000 pounds of a house purchase until June, lowering the relief to 250,000 pounds until the end of September.
“Interest rates remain highly competitive and we expect approvals to remain well ahead of pre-pandemic levels for some time to come,” Karthik Srivats, co-founder of mortgage lender Ahauz. “With the supply of homes for sale not even close to keeping up with buyer demand, it’s unlikely the market will cool significantly in the months ahead.”
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