Brokers warn of mini-budget-style repricing as markets reassess interest-rate outlook
Mortgage lenders are withdrawing and repricing products at a pace compared by brokers to the period after the September 2022 mini-budget, following a sharp rise in market volatility linked to the Middle East conflict.
Barclays, Halifax, and NatWest, among other lenders, have already increased mortgage rates, after a jump in oil prices added to concerns about inflation and the direction of UK interest rates.
Economists and financial markets now consider it less likely that the Bank of England will cut its base rate from 3.75% at its meeting next week. The central bank sets policy with the aim of keeping consumer price inflation close to 2%. Higher inflation expectations typically reduce the chances of near-term rate cuts and can increase the risk of rates remaining unchanged or rising.
“Last week, we saw a number of big lenders pulling fixed rates but [on Monday], it gathered momentum,” said David Hollingworth (pictured right), associate director at L&C Mortgages.
“While the number of changes is similar to the mini-budget, the scale of the rises isn’t yet as bad, averaging a 0.2 percentage point increase.
“Smaller specialist lenders have withdrawn rates without even repricing, things are moving so fast.”
Swap rates, which affect lenders’ funding costs and feed through into mortgage pricing, have also risen by about 0.6 percentage points since the start of the war.
“As a result, we’re likely to see another wave of lenders withdrawing or repricing deals over the coming days, including some who only increased rates last week,” said Nicholas Mendes (pictured right), mortgage technical manager at John Charcol. “When funding costs move this quickly, lenders typically respond fairly quickly as existing hedging rolls off, and they look to protect margins.”
Mendes noted that while borrowing rates had been gradually edging down over the past few weeks, “the escalation in tensions involving Iran has shifted that tone quite quickly, as financial markets tend to react rapidly when geopolitical risk feeds into inflation expectations.”
“Although oil prices have pulled back from earlier peaks, they remain materially higher on the day, still trading a little above $100 and roughly 10% higher overall,” he added. “Energy prices tend to be one of the first transmission points into inflation expectations, and that uncertainty has filtered straight through into government bond and swap markets.
“Looking ahead to the next week or so, much will depend on whether markets settle or if volatility continues. Swap markets had previously been pricing in several Bank of England cuts this year, but expectations have shifted quickly. At this stage, we are closer to a scenario where perhaps only one cut materialises across the year, rather than the series markets had anticipated a few weeks ago.”
Hollingworth, meanwhile, advised borrowers looking to secure a new deal to act now as current pricing may not be available for long if funding costs continue to move. “We’ve seen lots of customers fix their rates to protect against further increases,” he said.
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