Over recent months, large mortgage rates have fallen significantly. Citywire Money reports that ‘homeowners have been enjoying a race to the bottom when it comes to fixed rate mortgages, with five year deals sitting between 2 per cent and 3 per cent for those with a large deposit.’
Now, however, banks are facing a ‘double whammy’ of rising borrowing costs and the implementation of new measures to improve their balance sheet security. Seven UK lenders have already announced that they have to find a combined £27 billion to shore up their balance sheets. So, are the costs of high value mortgages set to rise?
Change to leverage ratio rules may push up large mortgage rates
The Bank of England and the Prudential Regulatory Authority recently reported that seven UK lenders – Nationwide, Barclays, Co-op, HSBC, RBS, Santander and Standard Chartered – had to raise a combined total of £27 billion in order to satisfy new bank rules.
The shortfall has been caused by the UK government’s early implementation of a new European rule stating that all lenders have to hold 3 per cent of the amount they have lent in loans as capital (the ‘leverage ratio’).
James Ferguson, founder of The MacroStrategy Partnership, said that the new leverage ratio rules mean that banks can no longer pretend their assets are less risky than they are and they can no longer use future predicted capital as an asset.
Islay Robinson, CEO of London mortgage advisor Enness Private Clients said: “These new rules mean that banks are going to have to raise billions of pounds in cash in order to reach this magic leverage ratio of 3 per cent. While lenders have not moved to increase mortgage rates yet, it can only be a matter of time before many decide that it is time to hike the cost of borrowing.”
And, it isn’t just changes to bank capital rules that are set to push up large mortgage rates. Over the last two weeks lenders have faced an increase in gilt (government bond) yields and interest rate swaps. We look at the impact of this next.
Is an increase in the cost of bank borrowing set to result in higher large mortgage rates?
Citywire Money reports that there has been a 0.8 per cent rise in five year gilt yields this year which has impacted the cost of interest rate swaps. Fixed mortgage rates are in turn then priced against interest rate swaps, the yield on which has recently increased from 1.35 per cent to 1.57 per cent.
Mr Robinson, the large mortgage specialist, added: “In simple terms, rising gilt yields make interest rate swaps more expensive. As swap rates increase it makes it more expensive for lenders to borrow money on the wholesale money markets. And, as the cost of funding increases, so does the cost of mortgages.
“Over the last couple of weeks there has been a rise in interest rate swaps and this ordinarily results in more expensive mortgage deals. While there has been no sign that lenders have raised the rates on their high value mortgage products already, it may be sensible to secure a deal sooner rather than later,” he added.
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