Why are mortgage deals being pulled? UK rates chaos explained as markets brace for interest rates hike

The mortgage market is continuing to see a chaotic mix of rising rates and product withdrawals after worse than expected inflation figures in May.

Market analysis by Moneyfactscompare has shown the number of residential mortgages on offer has almost recovered to levels last seen on 22 May. But major lenders are continuing to withdraw their products at short notice as rates climb sharply - the latest big name to do so being Santander.

On Monday (12 June), 4,952 fixed and variable rate mortgages were available - almost 300 more than the previous week but 50 fewer than there were in advance of the latest CPI announcement last month (5,012). Availability levels remain well above where they were in October 2022 when Liz Truss’s Mini Budget caused chaos in the market.

The latest figures come after inflation failed to fall by as much as economists had forecast in May. Not only does it mean the UK cost of living crisis isn’t budging as quickly as expected, but it opens the door to further Bank of England base rate hikes. The UK’s central bank is due to meet again on Thursday 22 June.

It also follows news that more first-time borrowers are seeking out longer-term deals with the hope of bringing costs down. A study by trade body UK Finance has shown 19% of people looking to get onto the housing ladder for the first time took out a mortgage lasting 35 years or more in March 2023 - the highest proportion since April 2005 when records began.

Why is there chaos in the mortgage market?

As we saw last autumn - when Liz Truss’s policies threatened to make inflation worse and also led to a drop in market confidence in the UK’s public finances - mortgage lenders do not like economic uncertainty. The uncertainty blighting the UK economy at present is down to two slightly different, but related, issues.

On the one hand, a bad set of inflation statistics has led to fears the Bank of England could ratchet up interest rates to their highest level since the last financial crisis. On the other, markets are growing sceptical about the government’s economic plans after Chancellor Jeremy Hunt suggested two of Rishi Sunak’s five key pledges for 2023 were contradictory. Hunt said he would accept a recession if it brought interest rates down (a statement which put Sunak’s plans to ‘halve inflation’ and ‘grow the economy’ in opposition to one another).

Fears about the bank rate have fed into rising swap rates, according to several market analysts. This market is now behaving as if the Bank of England will raise interest rates to 5.5% by the end of this year - although some expect rates could go higher still.

The way the swaps market works is complicated, but what you need to know is that when rates rise there, fixed rate deals usually become more expensive. The other thing to note, according to Mark Harris - CEO of mortgage broker SPF Private Clients - is that swap rates can be volatile, so what we’re seeing could merely be a “knee-jerk reaction”.

Meanwhile, concerns about the government’s economic plans in light of worse-than-expected inflation have fed into a surge in bond yields (i.e. the return investors get if they hold government debt). Yields tend to rise when markets lose confidence in the UK’s public finances.

In the wake of the most recent inflation data on 24 May, they surged close to where they were when Liz Truss was Prime Minister. Despite falling back over the following week, they have since surged even higher to within only 0.2 percentage points of where they were during the Truss premiership.

At a public finance level, this is bad news because it makes government borrowing more expensive. But it is also bad news for mortgages, as bond yields influence how much lenders fix their rates at.

Again, the reason why is fairly complicated. But, put very briefly, mortgage lenders sell financial products to investors that are based on the mortgage rates they sell. To attract investors in, the rates of return have to be competitive with bond yields. So when bond yields rise, mortgages tend to get more expensive.

Why are mortgage deals being pulled?

In response to the issues we’ve outlined, mortgage lenders have two main options: make their products more expensive or remove them from sale to wait to see if the changes in the market are a flash in the pan or a sign of something more permanent.

Most financial institutions have increased rates with averages for short and mid-term products now sitting above 5.5% - 0.5 percentage points above where they were just over a fortnight ago. But some lenders have taken the other route.

On Thursday (8 June) HSBC unexpectedly pulled the deals it offers through mortgage brokers for several hours in response to market uncertainty. On the following Monday (12 June), Santander paused some mortgage applications due to “changing market conditions”. Reporting by the PA news agency suggests both banks may have been offering deals slightly below the market rate, and were subsequently inundated with applications.

It appears likely the situation will continue until at least the next interest rates announcement on 22 June. Most economists expect the Bank of England will increase its base rate again.