Mortgage rates set to rise this year as US rate hikes push up borrowing costs for British lenders

Mortgage rates are likely to edge upwards over later in 2017 and into next year - even if the Bank of England keeps Britain's base rate on hold, brokers have warned.

The Bank's monetary policy committee voted by a majority of eight to one to maintain the Bank Rate at 0.25 per cent yet again today, marking eight years exactly since rates fell to to their previous record low of 0.5 per cent.

But because most banks and building societies price their mortgages based on their 'cost of funds', mortgage rates are not directly linked to the current base rate in the majority of cases.




Over the past two weeks these funding costs have been rising, and with the US Federal Reserve hiking rates by 0.25 per cent yesterday, there are fears they will continue to drift upwards.

The cost of a mortgage depends largely on a mixture of the rates paid by the lender on savings to retail depositors, the returns demanded on private money and so-called 'swap rates'.

Pricing can also be linked to competition - in order to win more customers, a lender may be prepared to make less money on each loan, keeping mortgage rates lower.


A big influence, however, is swap rates. These determine the rate of interest that lenders pay to access money from other investors - and they have been rising for the past two weeks as markets anticipated yesterday's decision from the Fed.

Mark Harris, of mortgage broker SPF Private Clients, said: ’Swap rates continue to creep upwards and while we aren’t expecting a similar interest rate rise in the UK, if words like ‘inflation’ and ‘consumer price pressure’ keep being bandied about, swaps could rise further.'

Rising inflation is putting pressure on the Bank of England

Inflation in the UK is rising, with the latest figures showing the CPI rate rose by 1.8 per cent in the year to January 2017, compared with a 1.6 per cent rise in the year to December 2016.

This is nearing the Bank of England's target of 2 per cent inflation, which if exceeded, would normally trigger a hike in the base rate.


The Bank of England's governor Mark Carney has remained firm that interest rates are likely to stay on hold
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The Bank of England's governor Mark Carney has remained firm that interest rates are likely to stay on hold

However, the Bank of England's governor Mark Carney has remained firm that interest rates are likely to stay on hold, despite the Bank's prediction that CPI will hit 2.7 per cent later this year.

David Hollingworth, of mortgage brokers London & Country, said: 'The Bank of England has often stated that it’s prepared to look through the higher rate of inflation as a result of the weakening in the pound.

'It continues to take a cautious approach to lifting rates too soon given the uncertainty ahead around Brexit and concerns that higher rates could have a broader impact on the economy and job creation.'

UK economists also don't believe the Bank of England will raise rates any time soon.


Samuel Tombs, of Pantheon Macroeconomics, said: 'Wage growth weakened sharply in January, despite a further decline in labour market slack. Unemployment has been driven down by rising self-employment; employee numbers are flat. The latest data vindicate the Monetary Policy Committee’s view that rates can remain on hold for a prolonged period.'

Mortgage rates may rise before the base rate

The promise of a steady base rate may not keep mortgage lenders' pricing low however.

Harris said: ‘Higher swap rates will have an effect on pricing but any cost increase passed on by lenders is likely to be subdued by competition and the oversupply of money. In other words, lenders are keen to lend and want to attract business so to do this they will need to remain competitive on mortgage pricing.'

In the past the UK has generally followed where the US leads on interest rates but Andrew Montlake, of mortgage broker Coreco, said the two countries' paths have recently diverged.

'It seems we have been on a different trajectory, especially as we have the added complication of the unknown effects of Brexit,' said Montlake.

'Despite the fact that the US have raised rates and inflation is rising here in the UK, there has been no real sign to suggest that the UK will follow their lead in the short-term at least.

'That said, the UK does need to start getting back to some semblance of interest rate normality, whatever the new normal is, but there has been very little helpful guidance from the Bank of England recently.

'Whilst swap rates have increased slightly over the past two weeks as the talk turns to potential rises once more, there is so far nothing concrete to suggest that the current crop of low mortgage rates are going to end any time soon.'