Nationwide announces massive fixed rate mortgage increases

Posted on 10 June 2009 by Ray Boulger

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Following my blog a couple of days ago warning of imminent fixed rate mortgage increases Yorkshire Building Society yesterday announced increases of between 0.2% and 0.5% and today Nationwide has announced some massive increases from Friday. All its fixed rates are increasing, but the biggest increase is a stunning 0.86% on one of its 5 year fixes. A rate increase of this size on a £200,000 interest only mortgage will increase its total cost over 5 years by £8,600, or £143.33 per month!

The maximum and minimum increases are as follows:

• 2 year fixes between 0.16% and 0.61%
• 3 year fixes between 0.20% and 0.26%
• 5 year fixes between 0.20% and 0.86%

There is no obvious pattern to which rates are going up most. For example on 2 years it is the rates for the higher loan to values, whereas on for 5 years the biggest increases are on the rates to 60% LTV and the smallest on the rates to 85% LTV.

Such large and varied increases indicate that either Nationwide wants to rebalance its mix of business or it has reassessed the relative risks of different types of business, or perhaps both. It may also indicate that it wants to reduce the overall amount it lends.

If the latter is true yesterday's speech by Paul Tucker, Deputy Governor of The Bank of England, at The Association of British Insurers’ Biennial conference in London is prescient. He said, “For the moment it is unclear – as, I must say, it is bound to be at this stage – whether the financial system can generate the expansion of credit that will most likely be necessary to support recovery”. He warned against the risks from banks simultaneously deleveraging by cutting back on the availability of credit, pointing out that “not lending would be a counterproductive business and financial strategy.”

Nationwide is one of only 6 lender groups currently doing serious volume in the mortgage market and these rate increases will push more business to other lenders, most of whom will not want the extra volume and even if they do will in many cases not have staffed their new business departments to a level to enable them to cope with the extra demand.

I have no doubt that this, plus the increased costs of funds affecting every lender as a result of recent sharp rises in swap rates, will result in most other lenders announcing increases in the cost of their fixed rate mortgages in the very near future. The corollary is that, albeit probably after a little time lag, better rates are likely to be offered to savers prepared to tie their money up for at least 2 years.

Interest rates and equities appear to be rising because the market is coming round to the view that the economy is going to bounce back from the recession more quickly than was expected until recently. However, if rates rise too far too quickly there is a very real danger that whatever green shoots may be appearing will be strangled at birth. 

Category: Bank of England, Interest rates, Mortgages

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