Virgin Money Increases Mortgage Rates Amidst Market Volatility, Sparking Concerns of Wider Trend
Virgin Money has raised interest rates on several of its fixed-rate mortgage products, adding to the anxieties of homeowners facing rising borrowing costs. The increases, ranging up to 0.2 percentage points, affect two and five-year fixed-rate deals for borrowers with loan-to-value ratios of 65% or 75%, as well as selected shared ownership deals. These changes come in the wake of recent market turbulence triggered by record government borrowing, which has pushed up government bond yields and consequently impacted swap rates, the benchmark used by lenders to price fixed-rate mortgages. Experts warn that this move by Virgin Money could be a precursor to similar actions by other lenders, adding further pressure on borrowers already grappling with the cost-of-living crisis. The timing of these increases is particularly concerning for the approximately 700,000 mortgage holders whose fixed-rate deals are set to expire this year, as they face the prospect of significantly higher repayments.
The underlying cause of the current mortgage rate increases can be traced to the recent surge in government bond yields, which reached their highest levels in 26 years last week. Investor concerns about the UK’s economic outlook, fuelled by persistent inflation, have driven down bond prices, leading to higher yields. This increased cost of borrowing for the government has a knock-on effect on swap rates, which directly influence the pricing of fixed-rate mortgages. As swap rates rise, lenders are forced to adjust their mortgage rates accordingly to maintain profitability. The Bank of England’s base rate, currently at 4.75%, also plays a role in determining mortgage rates. While markets had earlier anticipated a potential reduction in the base rate to 4% this year, this now appears less likely given the persistent inflationary pressures. The Monetary Policy Committee’s upcoming meeting in February will be closely watched for any indication of the Bank’s future direction on interest rates.
Mortgage brokers are echoing the concerns about further rate hikes, suggesting that the current trend of increasing mortgage costs is likely to continue in the short to medium term. David Hollingworth of L&C Mortgages points to the recent price adjustments by several lenders, including Skipton Building Society, TSB, and Leeds Building Society, as evidence of this trend. He anticipates further increases as lenders react to the evolving swap rate environment. Nick Mendes of John Charcol emphasizes the impact of market expectations on future mortgage rates, noting that if inflation remains stubbornly high, interest rates may not fall as sharply as previously hoped. This uncertainty surrounding the future trajectory of both inflation and interest rates adds complexity to the decision-making process for borrowers considering their mortgage options.
Given the current market volatility and the potential for further rate increases, experts are advising borrowers nearing the end of their fixed-rate deals to consider locking in a new deal as soon as possible. While current rates may seem high compared to previous years, securing a fixed rate now could provide protection against further increases in the coming months. This proactive approach offers peace of mind and stability in a highly uncertain economic climate. Nick Mendes underscores the importance of acting decisively, particularly given the unpredictable nature of the market. While the risk of further rate hikes is significant, it is not a certainty, and borrowers should carefully weigh their options before making a decision.
The recent fall in gilt yields, following the release of December’s inflation data showing a slight slowdown, offers a glimmer of hope that the upward pressure on mortgage rates might ease. However, it is too early to determine whether this trend will continue. The interplay of various economic factors, including inflation, government borrowing, and the Bank of England’s monetary policy, will ultimately shape the future direction of mortgage rates. For borrowers, staying informed and seeking expert advice are crucial in navigating this complex landscape.
Beyond the immediate concerns about rising mortgage rates, Virgin Money has also announced a positive change to its affordability assessment criteria. The bank will now consider 15 different types of benefit income when evaluating mortgage applications. This broadened approach will enable more individuals relying on benefits to access mortgage financing, potentially allowing them to borrow more. This move is a welcome step towards greater financial inclusion, particularly in the current challenging economic environment. However, borrowers are still advised to carefully consider their financial situation and assess their ability to comfortably manage repayments before taking on a mortgage. Utilizing online resources such as mortgage comparison tools and calculators can help individuals make informed decisions. Seeking professional advice from a mortgage broker can also provide valuable insights into the available options and ensure borrowers secure the most suitable deal for their individual circumstances.
