Mortgage rates in the UK will rise further in coming days, and the next 10 days in financial markets will be crucial in determining how high they will go, according to the head of Principality building society.
Experts are predicting that a typical two-year fix, which has cost borrowers £850 a month, could go up to almost £1,500 a month, after Kwasi Kwarteng’s mini-budget on Friday shocked markets and sent the pound plunging, as well as triggering a government bond sell-off. Sterling hit a record low of about $1.035 on Monday morning and has recovered slightly to $1.08, but is still down 7% this month.
Julie-Ann Haines, the chief executive of the building society, which has 500,000 members, said: “This £6,000-a-year difference [in mortgage costs] is really dependent on whether the markets over the next two weeks continue to think that the Bank of England base rate will get to 6%.”
The pound’s slide, which makes crude oil, priced in dollars, and imported goods more expensive, threatens to push UK inflation, already at 9.9%, even higher and is expected to force the Bank of England to raise interest rates to 5% or 6% by next summer. It lifted its base rate by a half a percentage point to 2.25% the day before the mini-budget.
Haines told BBC Radio 4’s Today programme: “What we do know is over 2022 we’ve seen very significant increases. Even so far, what we’ve seen passed on in mortgage rates is resulting in about an extra £3,000 to £4,000 a year for an average £250,000 mortgage. What the markets do in the next 10 days is really quite important in determining how big the impact is.”
UK government bonds, known as gilts, are on track for their worst month on record, going back to the 1950s. The sell-off has pushed the cost of borrowing for 10 years up to 4.1%, from 3.1% before the mini-budget. The slump in gilt prices has forced several mortgage providers, including Virgin Money and Skipton building society, to pull deals.
Haines said Principality had a “a slightly smaller range than normal” and, as a small lender, was affected by others pulling mortgage deals, but that the mutual was working hard to help customers. She stressed that building societies and other lenders needed to be able to make a margin to survive as businesses.
“We no doubt see [mortgage] rates increase over the next 10 days,” she said. “If we can start to get a grip on what’s happening in the markets through building confidence from the Bank of England and the government then you are hoping that mortgage lenders will come back into the market.”