Economists predict increase in mortgage rates as cheap funding ends

 

Borrowers could be looking at increased mortgage rates, as the government withdraws a source a cheap borrowing for the banks at the end of February this year.

In August 2016, the Bank of England reduced the base rate to the historic low of 0.25% and it set up the Term Funding Scheme (TFS), specifically to encourage banks to pass the reduction on to their borrowers.

Whilst the decrease in the base rate was designed to stimulate borrowing, low rates meant less of an incentive for people to save and banks needed to find an alternative low-cost source of funding. The TFS scheme was created to top up bank funding levels at a generously low rate and has made over £108bn available to date.

As a result of the TFS, lending to households increased by 4% between June 2016 and September 2017. During the same period, banks borrowed approximately £85bn from the TFS. RBS and Lloyds have borrowed the most, with RBS borrowing £14bn and Lloyds Banking Group having loans of £18bn outstanding in September 2017.

Start planning your purchase or remortgage now

With the TFS ending at the end of February, banks will have to pay more for their funding. This could mean increased mortgage rates, as banks seek to recoup the extra cost. Economists are predicting that lenders could increase their rates by up to 0.25% above the base rate. It is also likely that we will see a reduction in the availability of competitive mortgage products, making it a tougher marketplace for borrowers to find a good deal.

With the Bank of England indicating that the next base rate increase could be sooner than expected, economists are predicting a rise in May and perhaps another before the end of 2018. With this in mind, if you are planning a property purchase or remortgage this year it might be prudent to start sooner rather than later. There are still good fixed rate deals to be had and mortgage rates are still relatively low – according to Moneyfacts the average rate for a two-year fixed deal at the moment is 2.35%. For those that are in the position to, it would be wise to take advantage of the current marketplace before these changes come into effect.

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Economists predict increase in mortgage rates as cheap funding ends

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