Fixed Rate Mortgages & an increasing BOE rate

jwrag

It seems almost everyone has a fixed rate mortgage. What happens when BOE interest rates rise above the level at which fixed rates are set. Does this mean the Banks will lose money? Will this lead to a bank collapse?

Thrugelmir

No the banks will not lose money.

Banks have reinforced their balance sheets since the GFC of 2006/08. The BOE now conducts regular stress testing on the banks to ensure that they can withstand sudden financial shocks.

jwrag

Surely banks use the BOE rate to set the level of interest to pay to depositors. Say a FTB gets a fixed rate mortgage (fixed for 10 years) at 2.5%, then some sort of economic shock occurs like a plummeting exchange rate that increases the costs of production for any product that involves imported components. Inflation rises and the BOE sets the interest rate at 5.0% (historically low) to dampen it. The bank is now making 2.5% on loans but paying out 5% on deposits, hence a loss.

Thrugelmir

Banks currently aren't reliant on retail deposits to fund mortgages. Hence why savings rates are generally very low. Banks in particular are able to borrow on the wholesale markets at fixed rates of interest themselves. The money they lend out can be back to backed with the money they borrow. Fixing the profit margin for the duration of the product term.

ACG

Banks will offer lenders x% if they tie in for 2, 3 or 5 year deals.
Banks will also buy in money from the money markets at x% for 2, 3 or 5 years.

The banks will then lend that money out.

So the bank of England base rate is irrelevant for people who are tied in to fixed rate deals.