Skip to content
Home » How Your Mortgage Rates Are Calculated

How Your Mortgage Rates Are Calculated

More than 1.4 million people in the UK will have had the joy of coming out of the security of a fixed rate mortgage into a tornado of hiked variable rates, often wondering if the weather was going to get worse. It is very stressful indeed. I get it.

Here is some more guidance.

We covered this at the beginning of the rate rises, and alerted borrowers not to panic into fixing with longer, higher rates. Hopefully you didn’t.

They are still falling despite the ‘news’.

The role of a central bank is to keep an economy in check. One of their biggest risks is wage inflation. That can cripple economies, as businesses who are struggling with inflation themselves are being asked for wage rises as their staff struggle with hiked costs. Pay awards were running at over three times the central bank’s target, almost unheard of.

And this is how they deal with that.

Headlines from the Bank of England (BOE) will be gloomy – for example – ‘Britons warned to expect high rates for longer as Bank presents gloomy UK outlook’. Last year we were told to expect the worst recession. Try googling ‘expect the worst recession’. Fill your boots listening to the doom-mongers, but before you judge the journalist, it’s the message that was being sent out from the Bank of England trying to slow the economy – and a well-known market maker trying to make money out of it.

It’s a game with the Bank of England and market makers (I’ll explain), but this can mean you make a big call on your family home based on communication aimed at the market makers of rates that you just wouldn’t be expected to grasp. ‘Prepare for a long an ugly recession’ was one headline. And so, cat and mouse games ensue, with market makers keen to do business on the mortgage market trying to second call the Bank of England.

This is how it works – think of the Overnight Index Swap (OIS) as the fixed rate of interest at which banks lend to each other overnight (Overnight Interest Swap). Think of the OIS rate as roughly the wholesale cost of money for the lenders to package their fixed rate deals.

They look at that rate, and then put together a package including their costs, profit and calculation of risk for the mortgage. A higher loan to value of say a 95% mortgage will cost more than a 50% loan to value.

And so, the market makers are always trying to outsmart the Bank of England who are trying to slow down the economy, versus their goal of doing business. So, on the one hand, the Bank of England will say ‘you’re all knackered’, and on the other, the market maker can see through certain realities like: ‘rates at this level will shut the country down and we can see inflation is weakening, so you’re wrong and we think rates will drop’.

Examples of this last year where mortgage market rate expectations were being revamped each month as new data arrived. While never ending gloom from the Bank of England, rate expectations went like this: July 2023 – peak expected in March of 6.5 per cent. Next month that was down 0.75% and the next month it was down to 5.42%. During this time the Bank of England hadn’t reduced any rates.

The Bank of England don’t meet each month now. The next is December 14 and then February 1, but all along the market rates that banks will be charging will have been fluctuating. As we stated back a year ago, rates would fall. They have and they are. Taking a closer rate at the aforementioned swap rate, this had plummeted over one per cent in the last three months.

I can’t see how the economy can take higher rates. I know certain sectors are struggling badly. I’ve been in London, Cornwall, Belfast and Oxford in the last week. In London, a restaurant’s staff had their coats on when we came in, and then turned the heating on and took their coats off. We were the only people there. I suspect February to reflect this feeling, but, remember, market makers will have been reading the financial data long before then.

So, speak to your independent mortgage broker rather than watching headlines and Bank of England meetings.

For a complimentary initial rate review with my Mortgage Director, and a copy of our most recent Mortgage Interest Rate Guidance Report, email Pat Greene on [email protected] or call 01872 222422. Peter McGahan is the Chief Executive Officer of Independent Financial Advisers, Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority. Story Saved

You can find this story in My Bookmarks.Or by navigating to the user icon in the top right.