It is common knowledge that the Brexit vote had a dramatic effect on global financial markets, with the pound losing about a quarter of its value since the EU referendum. However, what sort of impact does does this fall have on mortgage offers and rates?
The plummeting pound over the past few weeks has caused a fall in bond prices and an increase in the cost of in US shares, resulting in once-popular US stocks and sectors suddenly becoming significantly pricier than before. The price of British government bonds has also fallen during this time, which not only has an adverse effect on investor’s bond funds, but will also result in other knock-on effects too, such as an increase in the cost of loans for mortgage lenders.
The prospect of increased interest rates are one of the side-effects of the pound’s drop in value in recent weeks, and even though the Bank of England is yet to raise the base rate and lenders are still to increase the interest rates on money loaned for mortgages, ‘wholesale’ rates on the money market are already on the rise.
Should these wholesale rates continue, then the rates on mortgages and savings will more than likely increase as well. This could result in lenders being forced to remove their cheaper products, and reprice the other mortgage products they have to offer borrowers, at increased interest rates.
‘Swap’ rates drive the price of fixed-rate mortgages, and even these have increased in the past few weeks. One example of this is the five-year rate, which fell to just over 0.4% during August, and rose since then to around 0.7%. Overseas investors selling their gold investments to limit their losses because of the fall in the value of the pound, is very likely the reason for this.
Increasing gold rates tend to cause a chain-reaction where other rates are concerned, so mortgage rates will more than likely increase too, with these increasing “swap” rates.
But don’t panic!
For the time being, there is still fierce competition going on between lending companies to acquire mortgage business. This is helping a lot to keep the price of the best mortgage offers low, in spite of the fact that banks have to pay higher prices when they “buy” funding for mortgage lending purposes.
According to mortgage professional David Hollingworth, there was a significant decrease in swap rates in August after the cut in bank rates, but despite still being very low, they have shown a definite increase recently. Even though this would usually be a sign of mounting pressure on mortgage rates, lenders are still offering mortgage loans at cut rates, which is more than likely due to the stiff competition between lending companies.