Interest Rate Fluctuations

Interest rates are a hot topic right now and will likely continue to be so throughout 2022. With mortgage rates at record lows, rising inflation and noise of interest rate rises from the Bank of England was sufficient for mortgage lenders to increase rates a little already. Economic factors are the prime force behind what mortgage rates are available. However, when you see fluctuations in rates offered by a specific lender, it’s not always something that should be looked at too deeply. There may be another explanation for this.

Lower relative interest rates increase demand for mortgage borrowing and higher relative interest rates decrease demand for mortgage borrowing. The simple principle of supply and demand is used by mortgage lenders to control business volumes – how many applications they’re receiving.

So why would mortgage lenders need to control business volumes?

  • Loan-to-Value (LTV) Exposure – Not all lending is equal. Lenders are very conscious about the type of lending they’re doing and specifically, being over-exposed at high LTVs. A lender doesn’t want too many high LTV mortgages as if property prices were to fall, they may have a large number of borrowers in negative equity. To manipulate LTV exposure, a lender may simply increase rates on high LTV products and decrease/maintain rates on other products.
  • Staffing Levels – Particularly relevant during the pandemic, if the lender cannot cope with the amount of mortgage applications they are receiving, they will increase their interest rates to detract new business. Each bank has service levels which they aim to maintain, measured in the number of working days to complete each process. Staff shortages may mean they cannot match their published service levels and may increase rates to detract new business and allow themselves time to catch-up on a backlog.
  • Annual Lending – Mortgage lenders have target business volumes which they look to hit for the year. When approaching the end of the year, if they’re wanting to do more lending, they will decrease the rates to attract more business. In contrast, if they’re happy with their lending for the year, they will increase or maintain rates to detract new business.

The above represent just a selection of reasons why lenders need to control business volumes. Increasing or decreasing the interest rates offered is the simplest, most efficient way to do this.

If your current bank is increasing their mortgage rates, this does not necessarily mean you need to get your mortgage sorted as quickly as possible. As an example, it could simply be that they’re done a lot of high LTV lending in the year and they’re not looking to take on anymore of this type of business. To de-incentivise new applications, they may have increased their rates. This is a prime example of why using a broker who looks across the market can save you money compared to going directly to a bank. As a broker, we can easily identify when your bank is increasing their rates, but other lenders are not. In this case, securing your mortgage with someone other than who you bank with, will save you money.

Interest rates are the headline figure people look at when sorting out a mortgage. Despite not being the be all and end all, the interest rate is a predominant factor affecting which mortgage product is the cheapest available to you. If you’re currently on a high interest rate, even if you’re “fixed” into your current deal, you may be able to save money by securing a new mortgage at a lower rate. For professional advice, free of any charges, get in touch!