Lenders cull sub 4% mortgage rate deals on inflation concerns

A number of mortgage lenders are raising rates, despite the recent Bank of England Base Rate cut.

Mortgage lenders are hiking the interest rates they charge on certain mortgage products, in spite of the recent cut in the Base Rate by the Bank of England from 5% to 4.75%.

Customers may struggle to find loans at rates below 4% as lenders, including Barclays, NatWest, HSBC, TSB and Santander, have increased the rates they charge on borrowing by 0.2% to 0.6%.

Santander, for example, has raised rates on certain standard residential fixed rates by up to 0.29%, while NatWest’s five-year mortgage deal for purchasers with a 40% deposit will increase from 3.79% to 4.09%.

Why are mortgage rates rising?

Some industry analysts claim the increases on the very cheapest mortgages may be due to the rise in mortgage applications, which stretch resources at banks dealing with the flow of new customers wanting loans.

“While many lenders have opted to maintain their existing rates to preserve business volumes and service standards, those offering competitive pricing have been forced to adjust likely due to application levels,” Nick Mendes, mortgage technical manager at broker John Charcol, told Mortgage Strategy.  

“These influxes often stretch service levels, prompting rapid rate changes to manage demand effectively.”

Economic pressures may also be to blame, with Mendes also pointing out that mortgage swap rates – the inter-bank lending rates which indirectly affect mortgage rates – have increased.

These are based on future interest rate expectations.

It’s thought that lenders are pricing in an expected rise in inflation, following the Labour Budget and the return of Donald Trump as US President next year, which could lead to interest rate rises.

Where will mortgage rates go from here?

Mendes says he expects rates to “settle” by the end of the year and that an unexpected cut in the Base Rate in December could mean lenders cutting mortgage rates accordingly.  

However, other mortgage experts say not to expect a fall in mortgage rates any time soon.

"Unwelcome as it is for borrowers, it's important to note that there's no sign of rates skyrocketing as they have in recent years,” said David Hollingworth at L&C Mortgages.

“The Bank of England Base Rate is still expected to fall over time, but markets are questioning if the pace will be as rapid."

Meanwhile, Hollingworth says borrowers should act quickly to secure their purchase or remortgage as soon as possible. 

"Forecasting and perception changes frequently but for now borrowers should grab a rate whilst they can, to avoid missing out if the deal is subsequently withdrawn," he said.