This time it’s true: your mortgage rate will rise

The great rate reversal has been wrongly predicted in the past. But this time really is different, writes Olivia Rudgard

Banks and building societies are increasing the rates on their mortgages as the era of rockbottom interest rates finally comes to an end around the world. This week one building society, Skipton, increased rates on some mortgages by 0.37 percentage points while another mutual, West Bromwich, scrapped its marketleading 10-year fix, which charged just 2.59pc.

Riskier first-time-buyer mortgages have also been affected. Virgin Money, previously one of the cheapest lenders in this area, has already increased the cost of several of its mortgages for borrowers with 5pc deposits by up to 10pc.

Commentators say it is a matter of when, not if, the cost of borrowing to buy a home increases. Here’s why.

The interest rates paid by British mortgage borrowers are strongly influenced by movements in the global financial markets, which have experienced profound changes since the election of Donald Trump (see box, right). The cost of US mortgages has already soared by 0.4 percentage points, and commentators say British rates will not be far behind.

The most important interest rate globally is the American government’s cost of borrowing for 10 years. This has risen since the American election because of expectations that inflation will return.

The US 10-year rate then influences yields on the British equivalent, 10-year “gilts”, which in turn drive the cost of borrowing in the wholesale markets (fears of a “hard Brexit” and the fall in the pound have also caused the British Government’s cost of borrowing to rise).

For fixed-rate mortgage borrowers the most important wholesale rate is the “swap rate”. Swap rates, the cost of fixed-rate borrowing by lenders, plummeted after the Brexit vote in June, sending mortgage rates to record lows, but have been rising since August.

Since their lowest point on August 10, after Bank Rate was slashed, fiveyear swap rates have risen from 0.42pc to 0.97pc. Two-year swap rates have risen from 0.38 to 0.67, and three-year rates from 0.38 to 0.77.

Mortgage rates have broken several records this year, with deals that cost less than 1pc launched by HSBC and Yorkshire Building Society. Even 10-year fixes have cost less than 3pc.

Long-term fixes are likely to be the most immediately affected by a rise in swap rates.

Brokers predict that five-year and 10-year fixes could increase by 0.25 of a percentage point, while lenders keep two-year fixed rates low for longer to boost trading in the last few weeks of the year.

IS THIS ‘ THE GREAT ROTATION’? ( AND WHAT IS IT?)

Huge changes are afoot in the financial markets – and they spring from feelings of discontent among the electorates of the West.

First came a growing sense of injustice among savers and the less well off that policies of low interest rates and “quantitative easing” were impoverishing them at the expense of the rich. Opinion began to shift in favour of a rise in interest rates, articulated in Britain by no less a figure than the Prime Minister.

Then the election of Donald Trump and his plans for huge infrastructure spending sparked expectations that inflation would finally revive.

Higher interest rates and inflation are both bad for bonds, the first because bonds compete with cash savings for investors’ money and the second because bonds pay a fixed income, which inflation diminishes in real terms.

In effect, bondholders demand a higher yield to compensate for inflation, and this comes about by a fall in the market price of existing bonds. Bonds have risen for so long that some commentators are heralding this reversal as the end of a 30year bull run.

The reaction of share prices is more complex. On the one hand, shares perceived as “bond-like” suffer price falls in line with bonds themselves (see

Page 2). But investors who withdraw money from the bond market also need a new home for that cash – and many will choose the stock market, in what has been called a “great rotation”.

As a result, certain parts of the stock market stand to benefit from a sell-off in bonds.