Mortgage rates below 4% disappear: Why are they going up as interest rates fall?

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Mortgage rates continue to rise despite the Bank of England cutting interest rates last week.

Today, the final sub-4 per cent fixed rates on offer from major banks and building societies were withdrawn from the market.

So far this week, seven high street lenders have increased their mortgage rates. 

This may have come as a surprise to households with a mortgage - particularly given that the Bank of England voted to cut the base rate from 5 per cent to 4.75 per cent last Thursday.

As expected, many banks responded by cutting rates on savings products. In the immediate aftermath, big banks including Chase and Monzo reduced the rates available through their easy-access deals.

As of Monday, at least 27 easy-access deals have been cut or pulled since base rate cut.

Banks also cut rates on mortgage tracker deals that track the base rate and also on standard variable mortgage rates - the rate borrowers revert to after their fixed rate deal ends. This could benefit some 1.4 million borrowers.

However, fixed rate mortgages, which are the product of choice for 7 million households, are being whacked up. 

Going up: Mortgage rates are rising because markets now think interest rates will stay higher for longer, with inflation also forecast to remain higher than previously expected

Only a couple of months ago, there were more than a dozen banks offering sub-4 per cent rates. 

Now only Allied Irish Bank currently offers rates below 4 per cent - and those are expected to be withdrawn soon.

David Hollingworth, associate director at mortgage broker L&C Mortgages said: 'The slew of rate changes in recent weeks has continued to push rates higher, reflecting the higher costs for lenders, as the market outlook for rates has edged toward a "higher for longer" expectation.

'Now all major UK lenders' fixed rates have once again edged back above 4 per cent.'

Why are fixed mortgage rates rising? 

Market expectations about how quickly, and how low, interest rates will fall in future have shifted of late - and this is having a direct impact on fixed mortgage rates. 

The Bank of England base rate is still expected to fall over time, but markets are now questioning if the pace will be as rapid. 

Last year, forecasts for where the base rate would eventually peak fell from a high of 6.5 per cent to 5.25 per cent, mortgage rates shifted with this.

At the start of this year, markets were pricing in six or seven base rate cuts in 2024, with investors betting on rates falling to 3.75 per cent or 3.5 per cent by Christmas.

New forecast: Capital Economics has changed its interest rate forecast because it now thinks the Bank of England will cut rates more slowly

But this did not materialise, and markets are now expecting only three or four interest rate cuts between now and the end of 2025, meaning the base rate would fall to 4 per cent or 3.75 per cent.

This has shifted over the past couple of weeks in particular, as Labour's Budget plan to borrow and spend more has slightly troubled Government debt markets, sending interest rate expectations and gilt yields higher.

There are also fears that Donald Trump's return to the White House could have an inflationary impact on Britain. This could cause the Bank of England to hold interest rates higher for longer.

Jack Tutton, director at broker SJ Mortgages told the news agency Newspage: 'The Budget has been a disaster for the mortgage market. It came just when we were seeing the green shoots of recovery. 

'The cost of borrowing has risen significantly for lenders compared to what it was before the Budget. 

'This has given lenders little choice but to pass these increases on and raise mortgage rates.'

Tutton thinks this is being driven by concerns inflation may start to rise again, above the Bank of England's target of 2 per cent. It is currently 1.7 per cent. 

The Chancellor's Budget policies of increasing employers' national insurance contributions could push up inflation, he says. 

Inflation forecast: The Bank of England expects inflation to hover just above 2% until 2027

'They will leave a lot of businesses little choice but to increase prices to help cover these additional costs,' he added.

'These increases are likely to push up inflation once they come into effect, which will mean interest rates staying higher for longer. This will be to the detriment of mortgage holders.'

Mortgage market expectations are reflected in something known as Sonia swap rates. 

These are agreements in which two counterparties, for example banks, agree to exchange a stream of future fixed interest payments for a stream of future variable payments.

Put simply, swap rates show what financial institutions think the future holds concerning interest rates.

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As of 12 November five-year swaps were at 4.05 per cent and two-year swaps were at 4.26 per cent - both trending well below the current base rate. 

Five-year swaps are up from 3.87 per cent on 29 October - the day before the Budget. They are up from 3.7 per cent on 24 October. 

Emma Cox, managing director of real estate at Shawbrook bank, said: 'Fixed-rate mortgages are priced based on a range of factors beyond just the current BoE base rate including swap rates and general economic risks . 

'These factors consider the anticipated cost of funds over the term of the mortgage. 

'It's possible for the Bank of England base rate to decrease today, yet the market might simultaneously adjust its expectations around the pace and volume of future rate cuts. 

'This shift can lead to increased pricing for longer-term fixed rates, as we've seen recently.'

What if I need to remortgage?  

Forecasting changes frequently, but for now the advice to borrowers who need to remortgage in the next few months is to secure a new rate now. 

Usually, borrowers can still change their mind and switch to a different rate - either with their existing lender or a new one - if a cheaper one becomes available before their new mortgage starts.

On the other hand, acting early means they will avoid missing out if rates rise. 

'For clients nearing the end of their fixed-rate terms, it's essential not to delay in the hope that rates will revert to levels seen weeks ago,' said Nicholas Mendes of mortgage broker John Charcol.

'Securing a deal now provides certainty in an uncertain market. There is always the option to review and adjust if circumstances change but acting promptly minimises exposure to further rate increases.

'I can't stress the importance of staying informed and proactive when managing mortgage commitments in today's rapidly shifting financial environment.'