After years of steady mortgage rates, there has been a sudden spate of increases that is causing a panic among homeowners. But why have the banks suddenly started cranking up rates?
At this point, many people will start muttering about profit-mongering and the greed of the banks. Unfortunately, that is the easy answer but not the right one. While I’m sure the man with his hand on the interest rate dial has the bank’s bottom line at the back of his mind, it’s not the driving force behind the move.
Lenders have been pretty good to mortgage holders in recent years but external events mean times have to change.
For the past few years, mortgage holders sat on a bank’s standard variable rate (SVR) – the rate you move to when you fixed or tracker deal ends – have enjoyed relatively low interest rates due to a couple of reasons. Firstly, the Bank of England base rate has been stuck at 0.5% for three years meaning SVRs that are linked to the base rate has been kept low.
Secondly, in April 2008 the Bank of England opened a Special Liquidity Scheme (SLS) to improve the flow of money in the banking system following the credit crunch. The scheme allowed banks and building societies to swap their high-quality mortgage-backed securities for UK Treasury Bills for up to three years. This meant the banks could get hold of cheap funding for their mortgage books. But the scheme closed on 30 January this year, forcing the banks back to the much more expensive retail and wholesale markets for mortgage funding.
One of the main factors that decides the cost of mortgage lending on the wholesale market is Libor (the London Interbank Offered Rate). This is the rate at which banks lend money to each other. It has been steadily rising for the past two years, meaning that getting the money to hand out in the form of mortgages has been getting more expensive on the wholesale market.
With all this in mind, it’s hardly surprising that the banks are starting to increase mortgage rates where they can (some lenders, such as Nationwide, have SVRs that are tied to the base rate so they can’t increase them). It seems the good times for mortgage holders may be coming to an end.