Looks like homeowners have been warned to set their mortgage rates – “before it’s too late” – for about a decade.
Professional brokers, of course, have every interest in encouraging their clients to remortgage, or even switch from an expensive fixed-term contract to a cheaper new one, so you have to take what they say with a big spoonful of salt. . However, the alarm bells are really ringing now.
We are in the Alice in Wonderland situation where simultaneously lenders are offering the cheapest deals in history and almost everyone expects interest rates to rise sharply, in order to contain inflation. high which may get out of hand. The banks have yet to bite the bullet, but there are signs the time is fast approaching when they will.
One indicator is the price of “swap rates”, which ordinary bettors are not aware of. These contracts are what banks use to set their own costs before lending to home buyers through residential mortgages.
The average 10-year swap has gone from 0.36 pc in December 2020 to 1.31 pc now, an increase of 264 pc. Other factors determine mortgage rates, for example whether the bank is actively trying to attract liquidity etc., but swaps are a good approximation of future rates.
Financial markets now expect the Bank of England to raise the overall interest rate by 0.15 percentage points before Christmas, taking the bank rate to 0.25%, with two further increases to start by 2022. By the end of next year, the discount rate is expected to be back to 0.75pc, the same level as before Covid.
David Hollingworth, of L&C, one of Britain’s biggest brokers, said rates were starting to rise, albeit slowly. “The huge competition that has driven mortgage rates down is expected to continue and may help mitigate, but not completely erase, the impact of any upward change in swap rates,” he said.
As always, the question for homeowners is how long to repair. As the chart below shows, after narrowing in recent years, the spread between two, five and ten year rates is now widening.