Mortgage rates can jump ‘with little warning’, borrowers told

The Bank of England held interest rates at 3.75% yesterday, with policymakers signalling ongoing concern about inflation and suggesting any rate cuts will be gradual and data-dependent.

As a result, mortgage lenders are expected to increase borrowing rates in the near term, reversing recent pricing that had seen some deals just below 3.5% only a month ago.

Ongoing conflict in the Middle East has added to uncertainty, with higher energy costs likely to feed into inflation and put further upward pressure on mortgage rates.

“While Bank Rate was held at 3.75% on a 9-0 vote, the tone of the MPC minutes was firmer than many had been expecting, said Nicholas Mendes, mortgage technical manager at John Charcol. “It is also worth bearing in mind that the meeting itself took place over the previous two days, so the decision to leave rates unchanged would have been made before the latest overnight strikes on Iranian and Qatari gas infrastructure. Markets are therefore reacting not just to the Bank’s message, but also to a much more severe geopolitical backdrop than policymakers had fully considered when they voted.”

That shift is already showing up clearly in market pricing. Gilt yields moved sharply higher after the Bank’s statement, particularly at the shorter end, and that matters because it feeds directly into how lenders price fixed-rate mortgages. It also suggests investors are rapidly reassessing the outlook for inflation and interest rates.

Mendes continued: “Only a short while ago, the debate was centred on when rates might start to come down. That has now changed materially. If energy prices remain elevated and inflation expectations continue to rise, the risk is no longer just that rate cuts are delayed, but that the Bank may need to consider raising rates again. The next meeting on 30 April now looks far more significant than it did even a couple of weeks ago, and any move may not necessarily be limited to 0.25 percentage points.

“For mortgage borrowers, the effect is immediate. Fixed rates are driven by future funding costs rather than today’s Bank Rate alone, so lenders do not need to wait for an actual base rate rise before withdrawing products or increasing pricing. I would expect more short-notice rate withdrawals over the coming days, and potentially some lenders temporarily stepping back while markets remain this unsettled.”

He added: “This is becoming a much more difficult environment because it carries the hallmarks of stagflation. Growth is already weak, but if inflation is being driven by higher energy costs and supply disruption, higher interest rates do little to solve the underlying problem. That leaves the Bank in a very difficult position and borrowers facing a market that can reprice quickly and with little warning.”