Why mortgage rates are surging again

Barely a day after the Building Societies Association (BSA) warned that becoming a first-time buyer was “possibly the most expensive it has been over the last 70 years”, a string of major lenders made it even pricier.

Barclays raised rates across a range of mortgage products by 0.1 per cent, the second increase in a week. NatWest said it would hike some of its two and five-year “switcher” deals for existing customers by the same amount. Certain two, three and five-year fixed rates will be increased by up to 0.41 per cent at the Co-op Bank. HSBC also joined the grim parade.

This has become part of a trend. James Hyde, spokesperson at Moneyfactscompare.co.uk, told me that the average two-year fixed mortgage rate currently sits at 5.83 per cent, which is the highest it has been since early January, when there were signs that borrowing rates were coming down.

More rises could be on the way. “While the uncertainty around the base rate continues, it remains to be seen if other lenders will follow suit with hiking their rates,” warned Hyde.

So what’s driving this? Haven’t we been told that interest-rate cuts are coming?

It bears repeating that the two and five-year fixed-rate products, the most popular options among UK borrowers, are priced based on future expectations through what is known as the interest-rate swaps market – and recently, the outlook for UK rates (as Hyde notes) has turned cloudy.

The last set of inflation figures were higher than the City had expected. Tensions in the Middle East have heated up the oil price, which heats up prices at the pump, which feeds into the inflation figure. America’s experience, with an unexpected rise in inflation last time round, isn’t directly relatable to that of the UK, not least because its economy is in a much better state. But it does show how hard the inflationary virus is to treat once it takes hold. This is the sort of thing that weighs heavily on the minds of the Bank of England’s rate-setters.

The members of the Monetary Policy Committee (MPC) got their fingers burnt by being too slow to act as last year’s inflation spike swept in and took hold. Their public statements concerning cuts have tended to be peppered with caution. Deputy governor Dave Ramsden did offer something last week, for those hoping for better times: “Over the last few months, I have become more confident in the evidence that risks to persistence in domestic inflation pressures are receding, helped by improved inflation dynamics,” he opined.

But while UK inflation is expected to fall to within the Bank’s 2 per cent target in the next month or two, forecasters expect it to pick up again later in the year – something the MPC has been keenly aware of (notwithstanding Ramsden’s optimism).

We are still likely to see cuts in rates this year. But perhaps two small quarter-point cuts, rather than the three some were hoping for. All this uncertainty has fed through to the swaps market, which has resulted in higher mortgage rates.

It’s not all bad news. Hyde said that while the majority of recent changes made by providers have been to raise interest rates, there has also been movement the other way. Skipton Building Society, for example, bucked the trend by reducing some of its products by up to 0.27 per cent this week.

While Skipton is a smaller lender than Barclays, NatWest or HSBC, it does show that there are deals to be had out there for people willing to shop around. As they should, especially in the current market. However, as the BSA report warned, the housing market is in a parlous state. It isn’t just high rates that hurt first-time buyers. It is high rates, high prices, and a profound shortage of supply.

Said Paul Broadbent, head of mortgage and housing policy at the BSA: “A properly functioning housing market is dependent on first-time buyers being able to afford their first home. Whilst building societies are creating bespoke, targeted innovations within the current regulatory framework, new thinking and radical changes are needed.

“There is no silver bullet to increasing first-time homebuyers, and it won’t be possible to help everyone who wants to become a homeowner in the current high price-to-income housing market. But there are many things that can help to fix the broken housing market. That starts with changes to regulations and support schemes [so] that [they] not only help today’s first-time buyers but don’t fail future generations.”

It also requires that more homes are built, at all levels of the market, and in the parts of the country where demand is highest but so is resistance. In other words, in London and especially the South East, where the influence of nimbyism has thwarted progress.

However, the supply shortage is affecting all parts of the market. This isn’t just an issue for would-be property owners. A new analysis of housing waiting list figures has just been released, showing that the average wait for a social housing property in England is five and a half years. The figures were released by the National Housing Federation, supported by Habinteg Housing Association, which said that the data showed “the critical need for immediate and long-term action by political parties across the country”.

There were 1.3 million households in England on waiting lists for social housing but only 236,928 new social housing lettings available last year (2022-23).

So yes, this is a major political challenge, and a generational one at that. It’s a sad fact that we’re (so far) not seeing much in the way of good solutions from Britain’s political parties.