NatWest ups mortgage charges: Could house mortgage costs return above 4%?

Sub-4 per cent mortgage rates are beginning to vanish with lenders re-pricing home loan deals upwards.

NatWest is the latest bank to announce it will be increasing mortgage rates, upping selected fixed rates by up to 0.3 percentage points.

It follows fresh in the wake of Santander and TSB, which announced similar changes on Monday.

As of Thursday, NatWest will be increasing its lowest five-year fix from 3.79 per cent to 4.09 per cent.

The deal, which was available to home buyers with a 40 per cent deposit or more, means that on a £200,000 mortgage being repaid over 25 years, the monthly payment will now be £1,066 a month, up from £1,033.

Those buying with a 25 per cent deposit will also no longer be able to access sub 4 per cent rates through NatWest.

NatWest is upping the interest rate on this product from 3.89 per cent to 4.19 per cent.

Mortgage rates had until last week been on a downward trajectory. Between the start of July and the end of last week, the cheapest available five-year fixed rate mortgage fell from 4.28 per cent to 3.68 per cent.

Meanwhile, the lowest two-year fix fell from 4.68 per cent to 3.84 per cent during that time.

Now they are creeping back up again with the lowest five-year fix at 3.79 per cent and the lowest two-year fix at 3.9 per cent.

More lenders are expected to follow suit and increase rates over the coming weeks.   

It is conceivable that sub-4 per cent rates may temporarily disappear, according to Ravesh Patel, director and senior mortgage consultant at broker Reside Mortgages

‘In the short term, sub-4 per cent rates are likely to disappear soon when considering the rising swap rates, which is a good indicator of the direction of fixed rate pricing,’ said Patel. 

‘As it stands there are only a handful of lenders who have sub 4 per cent rates on a two year fix at 60 per cent loan to value. If swap rates continue to climb it is likely those lenders will price up accordingly.’

Why are rates rising?

Mortgage lenders consider several factors when setting their fixed mortgage rates, from borrower demand to general economic sentiment and their own margins. 

Swap rates are the easiest way to interpret where fixed rates may be heading. 

Sonia swap rates are an inter-bank lending rate which essentially show what lenders think the future holds concerning interest rates.

When Sonia swaps rise sufficiently it often results in fixed mortgage rates going up, and vice versa when they fall.

In recent weeks Sonia swaps have been ticking upwards again. As of 11 October, two year swaps were at 4.01 per cent and five-year swaps were at 3.79 per cent.

That marks a rise compared to a month ago when two-year swaps were at 3.73 per cent and five-year swaps were at 3.38 per cent.

‘Quite a few things are affecting swap rates at the moment which is affecting market sentiments,’ adds Ravesh Patel. 

‘Namely the upcoming budget centred around potential tax rises, volatility in energy markets – which again was a major driver of inflation post 2022 – and continued geopolitical instability in the Middle East, especially its potential impact on oil prices.

‘Inflation as it stands is 1.7 per cent which is good news, however, service level inflation is 4.9 per cent.

‘The long term outlook is very optimistic; once inflation stabilises, swap rates will likely settle and maybe drop, but at a higher level than pre-pandemic lows to new ‘normal’ levels in the range of 3 per cent.

‘International trends from the likes of The Federal Reserve and The European Central Bank rate cutting to rate rising stances will impact UK interest rate decisions indirectly.’

Could falling inflation save the day for borrowers?

The Bank of England is widely expected to cut interest rates next month after inflation dropped below its 2 per cent target  for the first time in over three years.

The most recent reading from the ONS showed inflation falling to 1.7 per cent in the 12 months to September, down from 2.2 per cent in August.

This represent the first time since April 2021 that inflation has fallen below target and was below what markets forecasts of 1.9 per cent.

Some experts believe this increases the chances that the Bank of England speeding up the pace of interest rate cuts.

This would of course have mortgage brorowers hoping that mortgage rates will follow suit. 

However, Peter Stimson, head of product at MPowered Mortgages thinks there is unlikely to be any change in the direction of mortgage rates even if the Bank does cut base rate next month.

‘It’s tempting to regard such a big drop in inflation as the start of open season on cheaper mortgages,’ said Stimson.

‘Since the Governor of the Bank of England said at the start of the month that he was ready to reduce the Base Rate ‘more aggressively’, inflationary pressure has eased significantly and given the Bank a freer hand to cut further and faster.

‘With annual wage inflation slipping below 5 per cent for the first time in over two years and consumer inflation now comfortably under the Bank’s 2 per cent target, the stars seem well aligned for the Bank’s Monetary Policy Committee to make another Base Rate cut when it next meets in three weeks’ time.

He added: ‘There’s just one snag in this rosy picture. The swaps market, which ultimately determines how lenders price their mortgages, has been rising for the past fortnight.

‘So much so that one lender is currently offering a mortgage interest rate below the equivalent swap rate. 

‘Translation – it’s selling money for less than the wholesale price. Such crazy pricing is clearly unsustainable, but it also reveals the intense competition among lenders to win borrowers’ business.

‘Swap rates are determined by a broader range of factors than just the Base Rate, including gilt yields, which have risen sharply amid investor uncertainty about the upcoming Budget.

‘So while a November Base Rate cut now looks distinctly possible if not probable, there’s no guarantee it would instantly translate into much cheaper mortgages.’