Three reasons your mortgage rate might rise in 2015

Posted 7 January 2015 by Keith Osborne

Over the last few weeks there have been plenty of headlines announcing that mortgage rates have once again hit record lows. Falling inflation, strong competition between lenders and cheap money on the financial markets have combined to push down the cost of new mortgage deals.

However, while interest rates may be low now there are some compelling reasons why they might rise in 2015 – and not just because the base rate goes up.

1. A base rate could be on the cards

Last year, many experts predicted that interest rates would rise in 2014. The forecast then moved to sometime in 2015 and now many believe that the base rate won’t go up until 2016.

However, sentiment in the mortgage market can change quickly, as Keith Osborne from explains: “When the markets expected an imminent rate rise this summer the cost of borrowing rose. When the view changed, rates fell to their current level.

“It only takes a small piece of economic data for the markets to change their view. In this situation rates can rise sharply and quickly.”

Senior UK economist at Capital Economics Samuel Tombs said: “Swap rates are pricing in interest rates remaining at 0.5% until early 2016, but I think it is likely that the MPC will act sooner. If the economic recovery maintains its pace and wage growth starts to strengthen, then I think bank rate could rise in the second quarter of next year.”

2. Your lender might have to hold more money in reserve

If a regulator requires a bank to adhere to more stringent rules it can push up their costs which, in turn, make mortgages more expensive. For example, next year banks will have to comply with a new EU Mortgage Directive. While this is not expected to affect banks in a big way it could still push up costs.

If lenders are forced to keep more cash in reserve (a measure known as ‘capital adequacy’) this also increases their costs and pushes up their interest rates.

3. The economic future is uncertain

Many banks raise money for mortgages on the wholesale markets. These markets are volatile and can be affected by a range of factors. Where there is uncertainty, this can trigger rises in ‘swap’ rates which make it more expensive for lenders to lend.

In 2015 there is a general election, continuing issues regarding the Eurozone economies and a crisis with the Russian currency and falling oil prices. All these factors could certainly affect the money markets.

Osborne adds: “If swap rates rise it makes it more expensive for banks and building societies to raise money on the wholesale markets. This, in turn, pushes up the cost of lending which generally results in higher mortgage rates.”

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