Three major banks increase fixed rate mortgages: why are costs rising after the Bank of England cuts?

Three of Britain’s biggest mortgage providers are raising interest rates, despite the Bank of England cutting rates last week.

Santander, TSB and HSBC have all announced that prices for their fixed rate mortgage deals will rise this week.

Last week, TSB and Santander were among a number of lenders to announce they were cutting mortgage rates on tracker and variable rate deals, in response to the Bank of England cutting the base rate from 5 percent to 4.75 percent on Thursday.

This week, however, they’re doing the opposite when it comes to fixed-rate mortgage deals.

This will be a concern for mortgage lenders as the vast majority of households have fixed interest rates.

According to UK Finance, around 82 percent of households with a mortgage have a fixed-rate mortgage. That amounts to almost 7 million homes.

Most households are protected from immediate interest rate changes until their current deal expires, but the Bank of England said in its November Monetary Policy Report that around 800,000 fixed-rate mortgages, currently at 3 percent or less, would need to be closed each month. extended. year until the end of 2027.

Santander has announced increases of up to 0.29 percent to fixed residential rates for mortgage purchases and refinancing.

In addition to Santander, HSBC and TSB are also raising interest rates. HSBC will not announce the changes until tomorrow. Meanwhile, TSB yesterday increased the fixed interest rate by up to 0.3 percent.

Why are banks increasing fixed-rate mortgages?

The rate increases may seem counterintuitive given the Bank of England’s recent decision to cut the base rate to 4.75 percent – ​​the second cut this year.

Mortgage brokers believe this is likely due to rising borrowing costs due to higher inflation expectations following the Labor Budget and Trump’s election win.

Rohit Kohli, director of The Mortgage Stop, told news agency Newspage: ‘Many borrowers will be left scratching their heads as to why, less than a week after the Bank of England cut the base rate by 0.25 per cent, lenders like TSB are cutting their increase interest rates. fixed rates.

“Markets are still feeling the aftershocks of the Labor Budget. While not as disastrous as the mini-budget, the longer-term cost of borrowing continues to rise.

‘Gilt yields and swap rates respond not only to fiscal policy, but also to geopolitical uncertainties, including Trump’s re-election to the White House. Anyone who advocates major interest rate cuts is taking a gamble for the time being.’

Second cut: the Bank of England cut the base rate by 0.25% to 4.75% in November 2024, but fixed mortgage rates are now rising

John Fraser-Tucker, head of mortgages at broker Mojo Mortgages, said: ‘While the Bank of England’s decision to cut bank rates last week could lead some to expect broad cuts in mortgage rates, it is important to understand that Mortgage interest rates The market does not always move in perfect synchronization with the Bank of England’s base interest rate decision.

‘Fixed rate mortgages in particular are influenced by a complex range of factors that go beyond just bank interest rates.

‘These could include the lender’s own funding costs, their view of future economic conditions, competitive position in the marketplace and even their internal targets for new customers.’

The pricing of fixed rate mortgages is also largely based on Sonia swap rates – the interbank rate, based on future interest rate expectations.

When the Sonia swaps rise enough, this often results in a rise in the fixed mortgage rate, and vice versa when it falls.

On November 8, five-year swaps were 3.97 percent and two-year swaps were 4.19 percent.

Five-year swaps have risen from 3.87 percent on October 29, the day before the budget. They are up from 3.7 percent on October 24.

“Adding to the pressure is that swap rates – key indicators used by lenders to price fixed-rate mortgages – have risen, further necessitating these adjustments,” said Nicholas Mendes, mortgage technical manager at John Charcol.

‘The combination of market dynamics and rising swap rates underlines the difficult landscape in which borrowers find themselves.’

What should mortgage lenders do?

The advice to borrowers is simple: enter into a new fixed interest rate agreement as soon as possible to prevent interest rates from rising further.

A new mortgage offer often lasts up to six months, meaning homeowners can lock in a new rate well before their current fixed rate agreement expires.

“For customers nearing the end of their fixed interest rate term, it is essential not to wait too long in the hope that interest rates will return to the levels seen weeks ago,” Mendes said.

‘Securing a deal now offers certainty in an uncertain market. There is always the opportunity to review and adapt as circumstances change, but acting quickly will minimize exposure to further rate increases.

‘This development underlines the importance of remaining informed and proactive when managing mortgage obligations in today’s rapidly changing financial environment.’