Market indications are that mortgage rates are set to rise soon, with many top lenders already pulling their best deals from the market.
As speculation continues about when the Bank of England will next increase the base rate, swap rates have increased dramatically.
Swap rates show the rate at which mortgage lenders expect to be able to borrow and lend in future. A rise in the swap rate will often be followed by an increase in the interest rates charged to consumers, although other factors are also considered.
Analysis by the Northview Group, which owns mortgage lenders Kensington and New Street Mortgages, shows that the two-year swap rate has already passed the 1% mark this year – reaching its highest level since 2015.
In recent weeks major lenders including Coventry Building Society, Halifax, Nationwide and NatWest have all withdrawn some of their top deals from sale, according to David Hollingworth of mortgage brokers L&C.
“Rates remain extremely low, but the writing looks to be on the wall and rates are only likely to be on an upward trajectory,” he says. “As a result, borrowers will have little to gain from holding off from a switch now.
“The heightened expectation of an increase in base rate is already beginning to have an impact on rates. Swap rates reflect market expectation for interest rates and are a good indicator of rising funding costs for lenders. “
Other providers who have removed top deals include Sainsbury’s Bank, Skipton Building Society and Tesco Bank.
Alex Maddox, product and capital markets director of The Northview Group, says that swap rates indicate that there could be two base rate rises this year and that mortgage lenders have started to price this in.
“The majority of mortgage lenders use swap rates to manage the interest risk in their business. For example, if swap rates increase, lenders need to either increase mortgage rates, or take a lower profitability.
“There is wide speculation that there will be two more base rate increases by the end of 2018. After this, only one more is so far expected in 2019. We expect the base rate to reach 1.25% by 2020. Two-year swap rates which are currently at 1% are expected to increase to 1.3% by this time next year and to 1.65% in 2021.”
Andy Wilson, mortgage adviser at Andy Wilson Financial Services, says that many borrowers battling rising rates should consider remortgaging.
“For many borrowers who have bought their first home in the last few years, rising interest rates and higher monthly payments will come as a shock,” he says.
“Despite lenders ‘stress testing’ the affordability of mortgage payments against an assumed rise in interest rates, the actual increase in monthly outgoings will come as an unwelcome shock to many.
“Borrowers who have delayed switching to a cheaper deal may soon lose out unless they move quickly. Five-year fixes been particularly cheap for a while – some deals at around 2% for 5 years – and these are going to look even more attractive once base rates start to move upwards.”