Your feedback is essential to help us improve - click here to take our 3 minute survey.

2 banks to raise mortgage rates due to inflation fears – more could follow

2 banks to raise mortgage rates due to inflation fears – more could follow
Image source: Getty Images

HSBC and NatWest are hiking mortgage rates for those with large deposits amid fears that inflation is set to spike. This comes after both banks slashed rates to rock-bottom levels earlier this year.

So what will this development mean for the wider mortgage market? Let’s take a look.

Mortgage rates and inflation: what’s happening?

On Thursday, HSBC raised mortgage interest rates by up to 0.1% for customers with 25%, 30% and 40% deposits. The changes apply to fixed mortgage terms above two years.

Following these changes, the bank officially no longer offers three- and five-year fixed deals with sub-1% rates.

According to This Is Money, mortgage brokers have already been told that NatWest will soon follow HSBC’s lead and is expected to hike its mortgage rates by a similar amount.

Up until recently, many analysts have suggested that mortgage rates will go even lower, though recent reports of rising inflation have seemingly put a stop to these predictions. This is because analysts made these predictions on the basis that the Bank of England will stick with its all-time low base rate of 0.1%.

This now seems increasingly unlikely, with reports that inflation may top 4% by the end of the year. As a result, the Bank of England is now under pressure to increase its base rate sooner rather than later in order to cool inflation.

How much is the mortgage tide turning?

While 0.1% increases for a handful of mortgage products isn’t too hard-hitting at first glance, it’s important to recognise the bigger story. HSBC and NatWest may have just signalled the end of super-cheap mortgage deals. In other words, it’s very possible that other lenders will follow their lead.

To put this into context, HSBC’s recent mortgage hike comes just two months after it offered its lowest ever two-year fixed mortgage rate of 0.89%. While some would argue that a cheaper 0.86% fixed deal from Barclays is still available, it’s fair to say that this rate may not last much longer either.

What is inflation? And why is it bad?

Inflation refers to the rising cost of goods and services. A rising inflation rate is generally considered bad for the economy. That’s because it effectively erodes the purchasing power of those on fixed incomes.

High inflation is bad for savers too, for the same reason. In fact, savers are enduring a really rough ride at the moment, given that interest rates, even on market-leading savings accounts, are nowhere near the current rate of inflation. 

High inflation also increases the general uncertainty surrounding the wider business environment, which can lead to companies being more reluctant to invest. This can impact jobs and consumer spending down the line.

How does inflation impact the housing market?

When inflation rises, the value of any household mortgage debt is effectively reduced. To counter this, lenders raise their mortgage rates. However, they can only do this for new customers, or for existing customers on their standard variable rate (SVR).

With this in mind, fixed-term mortgage holders are safe from any rises for the time being. For this reason, those on a long-term fixed mortgage may actually welcome rising inflation. That’s because, in real terms, rising inflation effectively eats into the value of their mortgage debt.

While rising inflation can increase mortgage rates, it may actually reduce house prices for this very reason. That’s because more expensive mortgages reduce the amount of capital people can borrow to finance a home purchase. This is particularly the case for those seeking a large loan-to-value ratio.

As a result, higher mortgage rates may be welcomed by those favouring falling house prices, such first-time buyers. Higher rates may also be welcomed by those looking to move to more expensive properties. That’s because in a falling housing market, any reduction in the value of their current home would probably be less than the savings made on a new property.

What is the current rate of inflation?

According to the Consumer Price Index (CPI), which is the government’s preferred method of measuring inflation, the current inflation rate is 3.2%. This is well above the government’s annual target of 2%.

The Office for National Statistics will release new CPI data on Wednesday 20 October, which may confirm fears that inflation is continuing to accelerate.

Are you planning to buy a property? See the list of our top-rated mortgage deals.

Products from our partners*

Top-rated credit card pays up to 1% cashback

With this top-rated cashback card cardholders can earn up to 1% on all purchases with no annual fee. Plus, there’s a sweet 5% welcome cashback bonus (worth up to £100) available during the first three months!

Those are just a few reasons why our experts rate this card as a top pick for those who spend regularly and clear their balance each month. Learn more here and check your eligibility before you apply in just 2 minutes.

*This is an offer from one of our affiliate partners. Click here for more information on why and how The Motley Fool UK works with affiliate partners.Terms and conditions apply.

Was this article helpful?

Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.