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UK banks fear rush to remortgage as lenders raise rates further

Mortgage interest rates are expected to rise this week, as UK banks and building societies fear being swamped by applications from borrowers rushing to refinance as market conditions remain volatile, brokers warned.

Mortgage rates have leapt in the past two weeks as lenders have absorbed the implications of gloomy inflation forecasts, piling pressure on refinancing homeowners and first-time buyers already under strain from higher consumer prices and energy costs.

The Bank of England, which raised its official interest rate to 4.5 per cent last month, is likely to keep its base rate higher for longer to combat rising prices, leading to raised costs of wholesale funding for lenders. 

The majority of banks and building societies have already raised interest rates on fixed deals or have pulled mortgage deals from the market including big high-street names such as HSBC, Barclays, Santander, Nationwide and NatWest. 

Santander lifted rates by up to 0.43 percentage points over the weekend. HSBC last week added up to 0.38 percentage points to its mortgage interest rates and Accord, part of the Yorkshire Building Society, raised rates by up to 0.77 percentage points. 

But brokers anticipate there will be more pain to come. Andrew Montlake, managing director at broker Coreco, said that large rate increases would lead to higher demand for remortgages among worried borrowers, leading to further rate rises.

Continued volatility in swap rates, which guide lenders’ fixed-rate pricing, would discourage rate cuts, he added. 

“People look at the news on interest rates and decide to fix their mortgage, which creates additional demand for the lenders. And the lenders with the cheapest pricing get inundated so they put their rates up a little bit more — and off they go again,” he said. “By the end of the week, I expect most lenders will have moved rates upwards.”

Average five-year rates have climbed to 5.41 per cent from 3.37 per cent over the past 12 months, according to finance site Moneyfacts. But the jump has been sharper in recent weeks, with five-year rates moving up from 4.97 per cent at the beginning of May.

Line chart of average quoted mortgage rate (%) of 2-year and 5-year fixed mortgages showing that rates have jumped sharply in recent weeks

Adrian Anderson, director at Anderson Harris, said his staff had cleared their diaries this week in order to process applications before lenders could pull deals or raise rates further, requiring new paperwork and leading to delays. “I think there’ll be more increases this week, but hopefully not as brutal as those we’ve just seen,” he said.

The scope for further mortgage misery was underlined by research on Monday that found two in five people with a mortgage had not seen a rise in their monthly interest rate since lenders began raising rates 18 months ago. These people remain protected by a fixed rate.

However, the survey of 2,000 people released by investment broker Hargreaves Lansdown found that 48 per cent of mortgage holders said they would struggle if their monthly payments rose by as little as £150. 

About 1.3mn fixed-rate deals are due to end in 2023, most under 2 per cent, according to the Office for National Statistics.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said monthly payments for those with deals expiring in the coming year would rise by an average of £192. These borrowers “face the full force of the rises in one single hit,” she said. 

Brokers also pointed to the shrinking grace period between a lender announcing a rate change and putting it into effect, with some being withdrawn hours after they were announced. Montlake said the impact on applicants could be devastating. 

“A lot of people think they’ve got a quote in the morning and if, for whatever reason, they are not contactable for a few hours, they’ve lost the rate and it is no longer affordable for them,” he said. 

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