UK lenders increase mortgage rates after gilt yields rise on inflation data

Lenders, including Nationwide Building Society, have put up rates on new mortgages after higher-than-expected UK inflation data pushed gilt yields towards levels not seen since last year’s “mini” Budget crisis.

The decision comes after official data on Wednesday showed consumer price inflation was 8.7 per cent for April, significantly above the Bank of England’s forecast of 8.4 per cent.

The yield on two-year gilts shot up 0.24 percentage points to 4.37 per cent as a result, pushing them up towards levels seen last year when then-prime minister Liz Truss’s unfunded tax cuts wreaked havoc on financial markets.

Nationwide said that the movement in gilt yields, which are used by lenders for pricing mortgages, was behind the decision to increase the cost of all fixed-rate products by as much as 0.45 percentage points from Friday.

“In the current economic environment swap rates have continued to fluctuate and, more recently, increase, leading to rate rises across the market,” said the building society. “This change will ensure our mortgage rates remain sustainable.” 

Aaron Strutt, technical director at broker Trinity Financial, said that the move by Nationwide, the UK’s second largest mortgage lender, would prompt other companies to follow suit.

“It looks like we will be in for another choppy period with lots of rate changes,” he warned. “This is frustrating because it was not long ago that they started to come down.” 

Other lenders which announced that they would be increasing rates or withdrawing some products included Leeds Building Society, Foundation Home Loans, MPowered and Scottish Building Society.

Simon Gammon, founder and managing partner of Knight Frank Finance, said that markets were still recovering from the blow dealt by the “mini” Budget, when lenders withdrew thousands of products from the market in September.

Many temporarily stopped all new lending as they sought to avoid getting swamped with demand for mortgages which would rapidly become unaffordable, or else pushed up rates to reduce demand.

Although mortgage rates have fallen significantly from their peak straight after the “mini” Budget, they were beginning to track up as the BoE raised interest rates in an effort to fight inflation. The base rate reached 4.5 per cent in May, the highest level since 2008.

“We are seeing a delay in what we hoped would happen, that mortgages would come back down to 3 to 4 per cent,” said Gammon. “We’re still in the hangover [of the “mini” Budget and] markets are still taking paracetamol.”

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