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The six-year holiday is officially over. Earlier this year, Mark Carney, BoE Governor, forewarned banks that the base rate would rise. He said before the end of the year, but many predicted sooner rather than later. That sooner is imminent, as the cheap mortgage looks set to disappear from the High Street.
Already, Barclays and Santander plan to up their interest rates on any new mortgages. Other lenders will follow suit. But the form that the ‘domino effect’ on mortgage interest rate increases will take may differ.We may either see an increase of around one quarter of one percent on lenders’ most competitive products. This in line with the projected rise in the BoE’s base rate.
The alternative is mortgage lenders removing their cheapest mortgage deals all together. The increase in the cost of borrowing may not drive this other option. Rather, they may remove them to stave off a deluge of enquiries as people realise that their mortgage will cost them more.
It’s a trend that’s already began. In June, remortgages rose by 20% year-on-year as almost 24,000 rushed to lock in existing fixed rates. Like any market, greater demand on its own will push up prices.
But in this instance, the media coverage of promised increases in the cost of borrowing stirred the hornet’s nest. Those with SVR mortgages are aware of how much even a slight raise in interest rates could affect their repayments.
What effect will this have on contractors?
To date, few of the contractor-friendly lenders have announced increases. Indeed, other factors in the market have persuaded some lenders to drop rates. HSBC and Coventry, not known for a penchant for lending to contractors, dropped their rates only last week.
The reasoning behind their decision could be because of the ‘Swap’ rate. That’s the mechanism upon which lenders base their fixed rate mortgages. It dropped last week, despite Governor Carney’s reminder that the base rate will rise before the end of the year.
But, yes. Examples of dropping rates will become fewer and further between. Or, like the self-cert mortgage, disappear from the market for the foreseeable future. That’s because, as alluded, it’s not only the base rate driving up the cost of mortgages.
How much will mortgages increase?
The impact of the projected 0.25% raise will vary. Prior to the announcement, many lenders got involved in a price war. The decision to increase market share or profit on its existing customer base is always a balancing act for banks.
If a lender sees the raise as an opportunity to grow market share, its rates will change little. If, on the other hand, a bank’s mortgage book is toward the top end of full, you’ll see them raise prices.
It’s the latter that’s caused the rush to remortgage in June. A fixed rate whilst the base rate is rising protects the homeowner from the impact.
24,000 remortgagees can’t be wrong…can they?
But banks aren’t naive. If people leave it too long, the only fixed rate deals banks make available will include for imminent rises. And whilst those lenders amenable to contractors may be on the fence now, they won’t sit there for long.
There is no governing rule that says a bank or building society must increase their costs in line with the BoE base rate. But the signs are prevalent.
Some commentators predict we’ll not see the like of these low interest rates again in out lifetime:
“record low deals on offer today will soon gone – possibly never to return.”
Others suggest that by the end of 2015,
“the best rates will have long gone.”
As soon as we have firm updates from contractor-friendly lenders, we’ll keep you posted. Make sure you’re following us on social to be the first to know how the BoE increase will affect contractor mortgage rates.
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.
Posted by John Yerou
on August 11th, 2015 02:34am in