UK lenders raise mortgage rates ahead of further anticipated BoE hikes

British lenders have started to ramp up the pace of price increases on their fixed-rate mortgages as they brace for higher interest rates from the Bank of England.

At least nine banks and building societies have put up rates in recent weeks, with the BoE base rate now forecast to hit almost 3 per cent this year. The Bank raised its main interest rate by 0.25 percentage points on Thursday to 1.25 per cent, its fifth consecutive rise, and warned inflation could rise above 11 per cent before the end of the year.

Many banks passed on the rise this week to borrowers on variable-rate mortgages. But banks price their fixed rate mortgages on market expectations of the trajectory of interest rates.

On Thursday, HSBC raised the rate on its main fixed-rate mortgages by 0.45 and 0.5 percentage points, noting it had made the decision in advance of the BoE announcement.

The rise from HSBC was in response to the surge in the two-year swap rate, and at double the BoE’s 0.25 percentage point increase was the highest of any large lender.

The same day NatWest raised pricing by as much as 0.27 percentage points.

Nationwide introduced higher prices on its fixed rates by up to 0.4 percentage points. Halifax also increased its prices by up to 0.1 percentage points.

Earlier this month, NatWest chief executive Alison Rose said that mortgage demand remained strong despite rising costs, though she noted an “increasing trend” towards five-year fixed-rate mortgages.

Strong demand, driven by fears of further rate rises, has left UK lenders struggling to process new mortgage applications, with many withdrawing or repricing products.

Simon Gammon, managing partner at Knight Frank Finance, said: “Lenders are already repricing their product lines rapidly, often as much as twice a week. All are swamped with applications to remortgage, so are repricing both because interest rates are rising and because nobody wants to be the cheapest on the high street for fear of being overwhelmed. This means in many cases we are seeing mortgage rates rise faster than interest rates.” 

Moneyfacts, the finance website, said the average two-year fixed rate interest rate had risen from 2.02 per cent in June 2020 to 3.25 per cent this month.

Rachel Springall, finance expert at Moneyfacts, said: “Fixed rates are on the rise, with the average two-year fixed rate rising by almost 1 per cent since December 2021. As the rate gap between the average two-year and five-year fixed rate has narrowed, fixing for longer may be a sensible choice.