Experts warn mortgage rates will start rising again – here's why

Experts have warned mortgage rates could soon start to rise again after Coventry Building Society announced it would increase the cost of home loans.

As mortgage rates have fallen steadily in recent months and last week, five major mortgage lenders announced rate cuts on the same day.

Since the beginning of July, the lowest five-year fixed-rate mortgage has fallen from 4.28%. up to 3.68 percent

Meanwhile, the lowest two-year rate dropped from 4.68% to 3.84% during that time.

However, there are signs that the downward trend may soon stop – or even reverse.

Coventry Building Society has announced that various fixed rate offers will increase from Friday.

The Cooperative Bank also announced that it will withdraw some of its lowest interest rates tomorrow evening.

According to Nicholas Mendes, technical manager for mortgage loans at broker John Charcol, the events of recent days have caused anxiety in the markets. This led to an increase in treasury bond yields and swap rates.

'First, Andrew Bailey's recent comments, where he indicated expectations for larger or more frequent rate cuts, introduced some uncertainty,' Mendes said.

“Various MPC members expressed different views, signaling potential caution in future electoral behavior.

“Markets were pricing in rate cuts for November and December, but expectations for December have softened somewhat, reflecting this uncertainty.”

“Additionally, geopolitical tensions, in particular concerns about the conflict in the Middle East and its potential impact on oil prices, have increased market volatility.

“Although concerns intensified last week, talks in the US helped to stabilize the situation somewhat. However, further disruptions could increase inflation.

Change of tactic: Coventry Building Society has announced that various fixed rate contracts will see an increase in rates from Friday

Mendes says this will likely start to be reflected in the mortgage market, especially as lenders adapt to changing conditions.

“Given these factors, we expect that some lenders will begin to re-price their products, particularly among specialist lenders and smaller building societies.

“If swap rates continue to rise, it is likely that prime mortgage deals, which already have tight margins for lenders, will begin to reprice with a small upward revision, and markdowns will become more common if competitors do the same.

“Lenders typically quote two weeks in advance, so if this trend continues, any re-quote is likely to occur before the budget.”

Clear signs that mortgage rates are about to rise?

Mortgage lenders price their fixed mortgage rates based on sonia swap rates, financing goals, borrower demand and overall economic sentiment.

Sonia swaps are the easiest way to interpret where fixed interest rates may be heading.

Simply put, Sonia swap rates essentially show what lenders think the future holds for interest rates.

When sonia swaps rise sufficiently, it often results in fixed mortgage interest rates rising and vice versa when they fall.

In recent days, Sonia swaps have increased again. As of October 7, two-year swaps were at 4.07% and five-year swaps were at 3.81%.

This represents a significant increase compared to September 20, when two-year swaps were 3.82% and five-year swaps were 3.52%.

Make up your mind: Mortgage lenders have been cutting interest rates in recent months

David Hollingworth, associate director at L&C Mortgages, said: “Interest rates have been falling in the mortgage market in recent months, but this can happen suddenly.

“The fixed interest rate depends on market expectations of what may happen with interest rates and uncertainty over the upcoming budget, conflicting messages from the Bank of England and global unrest, all driving up costs for lenders again.

“Swap rates are a good indicator towards fixed prices and have increased again.

“If that happens, the rise in fixed-rate interest rates will come to a screeching halt and start rising again.”

However, Nicholas Mendes from John Charcol emphasizes that he still expects mortgage rates to decline in the long term.

Still, he recommends anyone entering the last six months of their current mortgage to lock in now.

“Any increase in mortgage rates is likely to be temporary and does not necessarily reflect the overall trajectory of rates over the next 12 months,” Mendes added.

“It's important to emphasize that anyone coming to the end of their fixed rate mortgage should get a new deal in place now.

“Constantly review the market or, better yet, use a broker who can monitor it and advise you when a better offer becomes available.

“While nothing is guaranteed and a variety of factors may delay the transfer of rate cuts, it is important to take proactive steps to secure the best deal and not take a 'wait and hope' approach.”