What is happening to your mortgage as major lender hikes rates ahead of inflation announcement

It’s been a turbulent few days for prospective and current homeowners looking for mortgages, with several major lenders announcing increases in rates after a period of decline in borrowing costs.

Nationwide, the country’s biggest building society, revealed its mortgage rates would rise by up to 0.25 percentage points on Tuesday. It comes after lenders Halifax and TSB said they were also raising rates on some of their products.

But, strangely, other lenders have gone in the other direction. Santander has announced mortgage rate cuts of 0.16 percentage points.

The mixed picture for mortgage rates comes after the Bank of England held its base rate at 5.25 per cent earlier this month. However, it is Wednesday’s release of inflation figures which appear to have resulted in what some brokers are calling a “yo-yo” market.

Annual inflation up to December was 4 per cent, up from 3.9 per cent up to November, and there are fears that the figure for January will be even higher, leading some lenders to “protect themselves” with their rate rises.

Here we take a look at everything you need to know.

Why have mortgage rates gone up?

Mortgage rates are closely tied to swap rates, which is effectively the rate the lenders pay a financial institution for funding, and that is affected by the Bank of England’s base interest rate and inflation.

Tomorrow, experts believe inflation will go up marginally from the annual 4 per cent recorded last month.

Ken James, director at Contractor Mortgage Services, told The Independent: “Lenders at the moment are pricing in potential inflation rises.

“I think what they are doing is safeguarding. They are saying ‘we think that everything is going to rise with all these figures coming in and therefore let’s partly protect ourselves against that future rise and get it in early’.

“I think with tomorrow, because I’m pretty confident rates are going to rise with inflation, I think lenders have just done it early, I think they are just protecting themselves.”

What is the impact of inflation?

All eyes on Wednesday will be on the Office for National Statistics’ release of the annual inflation figure up to January, with many believing it will go up marginally from the 4 per cent recorded up to December.

Inflation directly impacts the swap rate charged to lenders – and so they will pass it on to customers in the mortgage rates they charge.

Bank of England governor Andrew Bailey predicted the rate could temporarily hit the target 2 per cent in the spring.

But James said: “No, I’m lacking confidence there. I don’t see how. I’m having a conversation with clients who ask if the rate will come down mid year, and whilst we were all very optimistic the back end of December, kicking into January, I think sentiment has slightly changed, and I think if [Bank of England] base rates hold at the next announcement we’ll be very lucky.”

He added: “You know when you step outside and you say ‘it feels like it might rain’, you have that bit of dampness in the air, maybe the clouds are looking particularly gloomy. Like a weather forecast where you see all these different elements come together; the fact that swap rates are going up, the fact that rates are going up with lenders – it just feels like there is no other direction for it, but if it goes down there will be all out rate war. All the lenders will decrease again. I think it would really invigorate the market.”

Advice for homeowners

With some mortgage rates rising ahead of the inflation figures on Wednesday, the market is volatile and homeowners on variable rates, or those coming off fixed rates, will be wondering if they should go for a new mortgage product with a rate, or stick at their lender’s variable rate in the hope that rates will go down later in the year.

The uncertainty comes as a new lender called April Mortgages joins the market, offering Dutch-style longer-term fixed rates where the interest rate falls as the borrowing is decreased.

James said: “It varies from person to person… are they on a variable rate because they are looking to sell, are they waiting for prices to fall and don’t want to lock into anything now because they feel the prices are high and they want to see if they can get a cheaper deal? The downside to that is whilst they are sitting on the fence, it’s costing them as the variable rates are extremely high.

“So the conversation we are having at the moment is is there a halfway house where they can mitigate the increase of the variable rate, but not getting stuck into a fix? The halfway house of course now is tracker rates, so a lot more people now are contemplating if tracker rates might be the right way to go. It’s not as cheap as a fixed but it’s not tied to a variable.

“Maybe go on a tracker rate and ride the storm and see where it takes us.”

How is the situation impacting house prices?

Despite the uncertainty over rates, brokers have said the housing market remains buoyant. Earlier this month, Halifax reported that house prices in January were 2.5 per cent higher than the same month a year earlier.

James said the current situation was a “nightmare” for people choosing the right mortgage product, but added that with rates not rising dramatically, it wasn’t putting people off buying homes.

He said: “Rates will start to reduce. And so we see demand, and demand is driving prices, and Halifax has given a couple of notices to say the market is starting to rise. I think demand is pushing that and I think the market is busy. The appetite is there, and people are wanting to move in for summer.”