Mortgage Rates set to Rise

Mortgage Rates set to Rise After the End of the Term Funding Scheme

Those who have been aspiring to buy their first home have greatly benefited from rock bottom mortgage rates over the past few years, but now the government is preparing to make changes that are more than likely to cause a rise in mortgage rates.

Back in August 2016, the Bank of England cut the lending base rate to 0.25%, and set up a scheme that enabled banks to pass this cut onto borrowers. However, at the end of February, this scheme is set to end, driving up the prices of lending for banks.

Why are they going up?

When your bank offers you a mortgage rate, that rate is closely tied to their borrowing rate which is tied to the Bank of England. When the Bank of England’s rate is low, it makes it easier for a bank to offer low consumer rates.

After the financial crisis in 2008, the base rate fell and continued to drop dramatically until it hit its lowest in August 2016, at 0.25%. This cut was designed to make borrowing more affordable. However, low rates also meant there would be less incentive for consumers to save, meaning banks would have to take fewer deposits.

In September 2016, the Bank of England set up the Term funding Scheme in order to top up the banks funding. This scheme meant that over £100 billion was available at a generous rate. The TFS provided lenders with around £108 billion in funding to date, but that is all about to change.

Which banks borrowed from TFS

Between June 2016, and September 2017, banks borrowed around £85 billion from the Term Funding Scheme. In this time, lending to households rose to four percent, with almost £60 billion lent since the scheme was announced. Out of all banks that borrowed, Lloyds had taken the most, with an outstanding loan of £18 billion by September 2017.

Will rates go up?

The Term Funding Scheme ends on the 28th February, and it is highly likely that rates will increase from March onwards as banks will need to pay more for funding. However, it is hard to accurately predict how rates will be affected. Some economists have predicted that there may be a 0.25% increase above the base rate as this was the maximum rate banks were charged under the Term Funding Scheme.

Should I fix my deal?

If you are planning on taking out a new mortgage or are remortgaging, then you may wish to take out a deal over the lenders standard variable rate, but that is going to be difficult with rates going up. The average deal rate this week (as of 8th Feb 2018), is 2.36%, and is currently the highest average over the past twelve months.

However, rates are still below the level they were when the base rate was 0.5% back in August 2016. In that time, the average fixed rate deal was around 2.6%. It is also important to remember that more hikes may occur in the future. The Governor for the Bank of England expects rates to rise twice more over the next three years.

What’s important to remember is that not matter your worries for securing your new home, Haven are here to guide you as you find the right mortgage service. Our experts can provide you with guidance on which lenders you should consider, which mortgage works best with your circumstances, how much your deposit should be and more. To find out how else we can help with finding your mortgage, contact Haven IFA to discuss your options for securing your ideal home.

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