Market interest rate increase triggers mortgage rate hikes in the UK

Last week, several British banks, including Nationwide, raised their mortgage rates, and smaller lenders temporarily suspended their offerings. This response was prompted by a significant increase in market interest rates following higher-than-expected inflation data released earlier in the week.

This situation resembles a temporary halt in the mortgage market that occurred in late September and early October of the previous year. That shutdown was triggered by investor response to the policy plans of former Prime Minister Liz A, known as the "mini-budget."

Nationwide Building Society announced that it would raise the interest rates on certain fixed and tracker mortgage products by up to 0.45 percentage points, effective from the first week of June. Banking analyst John Cronin from Goodbody predicts that other lenders will likely follow Nationwide's lead in the coming days and weeks.

Cronin added that loan customers will inevitably face higher costs, which will negatively impact credit demand. Mortgage rates in the UK had been gradually decreasing throughout 2023, following a surge in October and November caused by the effects of the mini-budget.

A Nationwide spokesperson stated that the adjustment in rates was necessary due to fluctuating and rising swap rates in the current economic conditions. Mortgage brokers have reported that at least seven smaller lenders, primarily focused on the buy-to-let market, have either withdrawn or adjusted their product pricing.

The situation has created an eerie atmosphere reminiscent of the period following the mini-budget last year, according to Jamie Lennox, director of mortgage broker Dimora. Lennox explained that lenders typically adjust their pricing once a month in a normal market. Nationwide had already announced a repricing last week in response to the recent increase in Bank of England (BoE) interest rates.

The surge in government bond yields indicates a significant tightening of financial conditions in Britain, raising concerns for officials at the Bank of England. The two-year British swap rate, which influences financing costs for many lenders and sets mortgage pricing for two-year agreements, has experienced a sharp increase of approximately 50 basis points over the week.

If this upward trend continues, it would represent the largest weekly leap since September 1989, excluding the period surrounding the budget. Mortgage lenders typically adjust their product pricing based on prevailing conditions in their funding markets, but it is uncommon for them to temporarily withdraw or modify a substantial range of products unless it occurs shortly after a Bank of England interest rate change.

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Market interest rate increase triggers mortgage rate hikes in the UK

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