A short-lived price war between competing mortgage lenders is now over after the rates banks use to work out how much they charge for fixed-rate borrowing increased.
Several banks and building societies have cut interest rates on home loans in recent weeks to try and drum up new businesses amid a stalling housing market, leading to fewer people taking out a mortgage for the first time, or remortgaging.
But the rates banks use to work out how much they charge for fixed-rate mortgages have increased in the past few days, with brokers suggesting higher oil prices – with current costs now above $90 per barrel – could be behind this.
Nick Mendes, mortgage technical manager at John Charcol brokers said that there had been a “slowdown in lenders repricing.
“In the past few days gilts [investments in UK government debt] and Swap rates have gone up because of higher fuel prices,” he added.
Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial added: “The mortgage price war is over.”
The rising price of oil, caused by leading producers Russia and Saudi Arabia cutting production while demand is growing as people fly more. Oil prices rising can put upwards pressure on inflation because of the link between its cost and the cost of fuel and energy.
The Bank of England held the base rate – which sets the rate at which it lends to other banks – at 5.25 per cent last month, however Andrew Bailey said he would not “hesitate” to increase rates in the future were it necessary.
Markets are currently still expect no rise next month on the balance of probability, but the chance of a rise is not insignificant, at around 35 per cent.
Last month’s hold led to some reductions in mortgage rates, with the average five-year mortgage rate dropping below 6 per cent for the first time in nearly three months last week.
But Willem Buiter, a former member of the MPC, told i that he was “somewhat surprised” that rates were held in September, and added: “I expect them to correct this error at the next meeting.”
Others have tempered this warning. Ashley Webb, an economist at Capital Economics, has said that the organisation does not think the recent rise in oil prices will have a “big influence” on inflation, and therefore is still forecasting that rates will remain at 5.25 per cent.
While Ken Wattret, vice-president global economics at S&P Global, said upward pressure on crude oil prices has the capacity to tip the balance towards another hike but that prices “would probably need to be north of $100 per barrel, and stay there, to shift market pricing” for another rate raise.
Economists at Citi have said that oil will collapse to a low of $70 a barrel next year as the market moves to a surplus, which could be good news for inflation, and therefore mortgage rates.
And some brokers have said that lenders will still cut costs – albeit more cautiously – even if interest rates do edge up, because they need to increase business in a very slow market.
Katy Eatenton, mortgage and protection specialist at Lifetime Wealth Management, said: “We may start to see more cautious repricing until we receive the inflation figures in October and the Monetary Policy Committee meets again in November. However, the saving grace is that lenders are still desperate to do business and get as many applications in while they can still service the demand.”
David Hollingworth of L&C Mortgages said although we may continue to see more lenders improving their best rates, borrowers might “find that improvements are small.”
He said those waiting on variable deals – which tend to be more expensive – and “holding out in the hope of big cuts in fixed rates could be left disappointed.”
