This week saw UK mortgage rates hit a 15-year high, but with swap rates now beginning to decline, is there hope of repricing on the horizon?
Thousands of borrowers have been grappling with rising mortgage rates in recent months, with average two-year deals now surpassing 6% on a standard mortgage. This is the highest rates have been since August 2008, during the financial crisis.
The Bank of England base rate has been increased 13 consecutive times and now sits at 5%, with uncertainty over whether we may see more rises in the near future as the country continues to battle stubborn inflation.
However, there is what has been described as a “glimmer of hope” by one mortgage broker, while others believe that UK mortgage rates could follow the same pattern as the US, meaning that we could start to see mortgage costs come under control again.
Swap rates coming down
Swap rates are a key component behind mortgage rates, and the latest data shows that swap rates fell by 0.25% on Wednesday. While they are not the only influencing factor for lenders, they can be an indication of future changes and trends.
As Anna Sagar from Mortgage Solutions explains, swap rates are “based on what the markets think interest rates will be. If they rise then mortgage lenders will increase their pricing to maintain their profit margin, or if they rise too rapidly then they may have to pause lending or withdraw products until pricing stabilises.”
Likewise, if they fall, lenders may follow suit and begin reducing the pricing on their products as a response. After weeks of rises, the latest figures show that two-year swap rates have fallen from 6% to 5.76%, and five-year swap rates have dropped from 5.24% to 4.97%.
Predictions for mortgage rates
Andrew Wishart of Capital Economics said: “The US inflation data was a bit weaker than expected, and there is a view that the UK is following the US several months behind.
“If we are right, swap rates would reverse much of the rise over the past couple of months. Mortgage lenders’ spreads are particularly narrow at the moment, so mortgage rates might be a bit slower to fall.”
While the current climate makes forecasting the near-term future particularly difficult, the Capital Economics outlook suggests that mortgage rates will fall back down and remain stable just below 6% over the next 12 months. This is an improvement on rates that have been creeping closer to 7%.
Meanwhile, Riz Malik, of mortgage brokerage R3, also thinks current mortgage rates could begin to come down again, although there is too much uncertainty at this stage to predict how it will play out.
“When we start seeing a trend of falling swaps and lenders reprice downwards, even marginally, that will be a glimmer of hope,” he said. “It’s way too early to call the top of rate rises, especially considering the recent wage data.”
Households in better position than 2007
According to a recent Financial Policy Committee report from the Bank of England, while rising interest rates are more likely to make households and business borrowers cut back on their spending, it doesn’t seem that this will reach the levels seen at the start of the financial crisis.
It points out that while growing numbers of households will be hit by higher mortgage rates when they come to remortgage, the proportion of households with “high debt service ratios” is “some way below” the proportions of 2007.
Thanks to the “robust capital and profitability” of banks, they should be in a position to offer forbearance and limit repayment rises, says the Bank of England. The build-up of debt in the mortgage market is also limited due to the Financial Policy Committee’s measures introduced in 2014, boosting borrower resilience.
However, the bank warns: “It will take time for the full impact of higher interest rates to come through.”