Mortgage rates rise again – what's the impact?

Have some big names acted too soon?

Mortgage rates rise again – what's the impact?

Nationwide acted quickly on the back of the latest Bank of England rate hold - increasing its rates by 0.3% for new customers and home movers.

So is this a sign of things to come? And how has it impacted market sentiment?

How are rate rises affecting the market?

Scott Taylor-Barr (pictured left), principal adviser at Barnsdale Financial Management, said following a prolonged period of rate reductions, the property market seemed to have hit the rate floor.

“This signifies a critical shift wherein any subsequent alterations in mortgage rates are driven less by fluctuations in lenders’ funding costs and more by operational considerations,” he said.

This fundamental transition, Taylor-Barr added, has profound implications for lenders and borrowers alike, reshaping the dynamics of competition and pricing within the mortgage market.

In this new paradigm, Taylor-Barr said lenders find themselves navigating a delicate balance between attracting business through competitive rates, and managing the operational strain associated with an influx of applications.

When a lender emerges as the frontrunner, offering the most competitive mortgage rates at a given time, he said, they inevitably attract a deluge of inquiries and applications.

“While this surge in business is undoubtedly favourable, it also places considerable strain on the lender’s systems and personnel, potentially compromising service quality and efficiency,” Taylor-Barr said.

In response to this heightened demand and operational pressure, he added that lenders may opt to recalibrate their rates upward, strategically withdrawing from the spotlight to alleviate the burden on their resources.

However, Taylor-Barr said this action sets off a ripple effect across the market, as the lender that was previously second in line now ascends to the top position, facing a similar surge in applications and subsequent pressure to adjust rates accordingly.

“Thus, a cycle ensues wherein each successive lender in the hierarchy follows suit, incrementally raising rates to manage capacity constraints and maintain operational equilibrium,” he said.

Taylor-Barr said this cyclical pattern of rate adjustments perpetuates until a lender effectively ‘clears the decks’ by reaching a point of optimal capacity or strategic alignment.

At this juncture, he said the lender may actively seek to attract additional business by reducing rates, positioning themselves at the forefront of the market once again.

“However, the extent to which a lender can capitalise on this strategic manoeuvring depends on various factors, including the size, capacity, and risk appetite of the institution,” Taylor-Barr said.

In essence, he said the interplay between operational considerations and competitive dynamics shapes the ebb and flow of mortgage rates within the market.

As lenders navigate this complex landscape, Taylor-Barr said they must strike a delicate balance between attracting business, managing operational constraints, and optimising profitability.

“Meanwhile, borrowers must remain vigilant, understanding the underlying mechanisms driving rate fluctuations and adapting their strategies accordingly to secure the most favourable terms for their mortgage financing needs,” he said.

Are rates increases coming too soon?

Jake Stott (pictured right), founder at Mondo Mortgages, said having worked as a mortgage broker in the UK for some time, he has become intimately familiar with the unpredictable nature of the market.

“The recent rate hikes announced by Nationwide and Santander have sparked quite a buzz, reminiscent of a crowd scrambling to board a train that has not even reached the station yet,” he said.

Stott added that it is a curious phenomenon, considering these adjustments are supposedly in response to changes in swap rates, despite the Bank of England’s base rate remaining steadfast.

In many ways, he believes it feels akin to donning a heavy winter coat at the mere mention of potential snowfall next week.

While it is prudent to prepare for eventualities, he said, such pre-emptive actions can sometimes seem excessive, particularly when the underlying factors driving them remain uncertain.

“Personally, I cannot help but feel that Nationwide and Santander may have acted a tad hastily,” he said.

While it is natural for lenders to react to market signals, Stott said, the timing and magnitude of these adjustments can be subject to scrutiny, especially when they appear to precede significant shifts in economic indicators.

“However, here is where the plot thickens; if the anticipated dip in inflation figures materialises in the coming weeks, as many of us in the industry anticipate, it could completely alter the landscape,” he said.

Stott added that it is akin to eagerly awaiting the next episode of your favourite TV show, knowing that something exciting is on the horizon.

In such a scenario, he said the decisions made by Nationwide and Santander may be viewed in a different light.

“What initially seemed like a premature move could potentially be seen as a strategic manoeuvre in anticipation of broader market trends,” Stott said.

This, he believes, underscores the delicate balance lenders must strike between reacting to immediate circumstances and forecasting future developments.

“As mortgage brokers, it is our role to navigate these twists and turns with agility and foresight, guiding our clients through the complexities of the market while keeping a keen eye on emerging opportunities and risks,” Stott said.

While the recent rate hikes may have caught some off guard, he added that they also serve as a reminder of the dynamic nature of the mortgage landscape and the importance of staying adaptable in the face of uncertainty.

How do you believe the latest rate increases have impacted the mortgage market? Let us know in the comment section below.