Get set for a rise in mortgage rates

HOMEOWNERS could be hit with higher mortgage interest rates if they don’t fix now, experts are warning.

A perfect storm could see home-loan rates rise sooner than previously expected, and even before the Bank of England next hikes the base rate.

Yesterday, it was revealed that banks will soon be required to keep more cash in their reserves, after being put through an annual round of rigorous stress tests to prove whether they could cope with another financial crisis.

While the banks have been branded more resilient, the Bank of England’s Financial Policy Committee said it would be making changes to the amount of capital they have to hold to ensure they don’t go bust.

The Committee has suggested that, from March, banks may have to hold an extra 1 pc of the value of their assets than they already do. It’s a move that could mean banks have to quickly raise £10 billion.

One of the easiest ways for them to do that is by hiking mortgage interest rates. On top of this, the U.S. is widely forecast to raise its base rate of interest later this month. This could force up money market rates (where banks go to borrow money for loans) and the Bank of England could follow soon after.

All in all, it’s bad news for any homeowner who hasn’t locked in to a decent mortgage deal.

The average standard variable rate is currently 4.82 pc; if this goes up by just 1 percentage point, it will add more than £1,000 onto the typical annual mortgage repayment.

David Hollingworth, director at brokers London & Country, says: ‘If lenders have to hold more capital, it will come at a cost, which will ultimately feed through to the rates borrowers pay. The market is extremely competitive at the moment, so homeowners should take the opportunity to review their deal, given the ultra-low rates on offer.’

Currently, homeowners with a 10 pc deposit can get a two-year fixed rate of just 2.19 pc from HSBC. Those who want longer-term certainty can lock in for five years at 2.99 pc. Both deals have fees of £1,499.

With a 20 pc deposit, the rates get even lower. The Co-operative has a two-year fix at 1.54 pc, while First Direct has a five-year deal at 2.59 pc. For those with 40 pc equity in their home, the Post Office has the best two-year deal at 1.15 pc. On a £150,000 loan, monthly payments are £576.

With mortgage rates at such record lows, they can only go up from here.

There is a plethora of ten-year fixes on the market, which offer homeowners certainty about their monthly repayments for a whole decade.

Nationwide has the best deal for borrowers with a 10 pc deposit. Its tenyear fix has a rate of 4.19 pc and fees of £999. Woolwich, part of Barclays, has a deal at 3.25 pc for borrowers with a 20 pc deposit, while those with 40 pc to put down can secure a rate of 3.04 pc for ten years from TSB.

With the TSB deal, monthly repayments on a £150,000 loan would be £714, with a total cost over the deal period including fees of £40,160.

Many of these deals do have chunky fees attached to them, so it’s worth finding out whether choosing a deal with a slightly higher rate and no charges could work out a better offer.

Charlotte Nelson, finance expert at Moneyfacts, says: ‘The competition to be the lowest in the mortgage market has come to a head. But we all know these lows will not last for ever, so it’s vital borrowers grab a record low deal while they can. ‘By opting for a fixedrate now, especially a longer-term deal, borrowers will be able to secure low monthly repayments, as well as buffer themselves from any rate rise.’ Among all the bleak predictions for mortgages is, at least, the hope that it could lead to an increase in savings rates. These have already been nudging up — particularly on fixed rates.

But if banks need to raise more cash, they will have to pay savers more in order to attract their cash.