Are Mortgage Rates Due to Rise Again?

The most likely answer is yes, probably, and if your current deal is due to end within the next six months you should be looking to sort out a new deal right now. Most mortgage lenders produce offers which are valid for six months, and if the lender chosen offers a free valuation, there is nothing to lose.

The reason we are so certain that rates are going to increase is down to the current turmoil in the financial markets, especially the situation surrounding Lehman Brothers in the states and HBOS here in the UK.

For a period, which started before Easter and didn’t end until the school holidays were into their second week, the UK mortgage market has been characterised by high rates. Those lenders who remained in the market, had the appetite to lend, and more importantly had funds to lend were being very cautious. No one wanted to have the best deal, as no one believed their administration could cope with being top of the table. As soon as a lender found themselves at the top of the table they would increase rates and another round of tit for tat would start again.

Lenders will explain that the reason rates were so high was that the cost of funds meant they could not afford to offer cheaper rates, and huge arrangement fees were an absolute necessity. In reality there was a large dose of profiteering, from those who suddenly found that economic conditions had done in the competition. So what changed?

Well, quite simply, some lenders decided that their market share had fallen far enough and wanted to be back at the top of the table. They got there by cutting rates, and soon the tit for tat merry-go-round started back the other way. As fixed mortgage rates came down, an element of trust started to return to the markets, and this was reflected in the cost of wholesale money. There was even talk of a return to happy days again.

Then HBOS, the biggest mortgage lender in the UK had to be rescued by Lloyds TSB, and it became a case of “trust, what trust”. The LIBOR rate, which reflects the cost at which banks can borrow money from each other, has jumped by around 0.25% in the last few days, and this is bound to be reflected in fixed rates in the near future.

In fact, we have just received the first notification email from lenders confirming that First Active will be increasing their 90% two year fixed rate with effect from midnight. Nationwide have also advised that their rates will be on the increase shortly.