Financial Comment - Rising Rates

19th March 2012

Richard Lester of Apt Financial Management explains "With the Halifax and RBS recently increasing some of their mortgage rates there is a lot of confusion with mortgage holders as to why this has happened and is it likely to continue?

Recently the Halifax increased its’ standard variable rate to 3.99% which is an increase of almost half of 1% from 3.5%. The RBS has increased its flexible mortgage rates by 0.25%.

The reason for these rises is the increased cost in the way mortgages are funded. Lenders ‘buy in’ huge sums on money from the money markets from other banks, large financial institutions and pension funds etc. They borrow at one rate and lend to us at another and the margin is the way they make their money.

At the moment there is a lot of nervousness in the financial markets about the euro zone debt crisis. Lenders don’t know what involvement other banks have in Europe and the consequences if a country does default. So lenders price in the risk by increasing the rate that they lend to each other.

The knock on effect of this is that new mortgage products can become more expensive even though the base rate hasn’t changed. With the likes of the Halifax having 850,000 customers paying a relatively low standard variable rate, their new funding costs are increasing meaning at some point they have to balance the books.

Good news is that not all lenders can do this as some have guarantees that they won’t increase their rate unless the base rate increases. Also the Halifax variable rate is now on par with most other major lenders so I think we are unlikely to see further standard variable rate increases".

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