Saturday, 23 May 2015 00:00

Mortgage rates edge up thanks to higher wholesale costs

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Banks are being forced to pay more for five-year funding, pushing rates up.

Five-year fixed mortgage rates are starting to creep up after weeks of price rises on the markets where lenders access money for loans. Experts are warning rates may be about to rise further.

Last week HSBC pulled its market-leading 1.99pc fix and other lenders increased their rates, such as Coventry Building Society, which repriced its 2.19pc deal to 2.39pc.

The pricing of mortgages depends mostly on whether banks can access cheap funds. Lenders borrow on money markets, buying at the “swap” rate for a certain time period. These swap rates (the five-year rate is shown above) are loosely linked to the yield on gilts or UK government bonds, which after years of falls have been rising.

The pricing of gilt yields is influenced by expectations for future interest rates and inflation, among other factors.

Shorter-term fixed rates are closely aligned to the market view of inflation. If inflation is expected to remain low, gilt yields and, in turn swap rates, will stay low, keeping rates down.

But longer-term fixes such as five and 10-year deals are reflective of market expectation for Bank Rate. If lenders think interest rates will rise, longer-term fixed rates will push up.

Five-year swaps have been rising since late March, with sharp rises in the past month. Despite this, lenders continued to cut their rates to attract new customers. But the increasingly narrow profit margins on five-year deals mean lenders will be forced to review their prices.

David Hollingworth, of broker London and Country, said: “Lenders have been cutting rates to the bone but higher swap rates will start to feed through. People assume that Bank Rate won’t rise for some time, but many don’t realise that other factors such as volatility in Europe can also affect swap rates.”

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