Fixed rates have gone up?..... seriously!

Mark4444

So we have a 5 year fixed rate mortgage deal in place, but I do keep checking to see if they drop as we have an option to swap products ahead of exchange if we wish and my socks were just blown off by the fact that nationwide has increased their %..... won’t impact me, but I am genuinely in shock. Im sure there are some commercial reasons but it just didn’t seem logical to me as a consumer.  Am I missing a trick?

Thrugelmir

No tricks. There's an economic crisis underway in case you've missed recent events. 

Sncjw

What percentage did you get . Mine has stayed the same 

HampshireH

Makes business sense. They need yo make their money somewhere

Mark4444

1.94%. Even my financial advisor was a little perplexed - I get everyone needs to make money, so maintaining the rate I can understand, but increasing it will directly impact the housing market which is the backbone of the economy.  

Comms69

Mark4444 said:

1.94%. Even my financial advisor was a little perplexed - I get everyone needs to make money, so maintaining the rate I can understand, but increasing it will directly impact the housing market which is the backbone of the economy.  

the housing market is not, and never has been, the backbone of the economy

princeofpounds

Perhaps I can help explain. When a bank lends out money, it needs to build in a number of components into its margins. The first is the cost of funding. Funding comes from a mix of sources, mostly customer deposits. But it is very strongly influenced by the BoE base rate. That has indeed gone down.

The bank also needs a margin to cover its anticipated cost of risk on that type of loan. This is the amount of loans they make that go bad and are not repaid. The banks need to be able to cover this so they can continue to pay all their depositors. Given the huge economic shock, projections of the cost of risk have understandably gone up.

The bank also needs to factor in a decent return on equity. To exist as a bank, shareholders need to put in equity capital. To grow the bank and credit available to the economy, shareholders need to be incentivised to leave profits in the bank to build up equity capital further. Equity capital exists for a few different reasons, but one of the main reasons is to ensure that if the cost of risk calculations turn out to be an underestimate, there is still some money in the bank to keep depositors whole. Shareholders are the first people to lose money when a bank makes a loss, and if they were not compensated for that risk, no-one would put equity into a bank. The 'cost' of this equity capital to the bank has also gone up. Partly because of the general uncertainty over economic conditions - the standard risk models don't really incorporate pandemics and so are less reliable than normal - and partly because other equity investments have all got a hell of a lot cheaper and so the 'opportunity cost' of bank equity is higher.

So far, the second and third factor appear to outweigh the first factor. That's one reason why the rate cut was so appropriate - if it had not happened, you would be facing even higher end rates. It's probable that as we move closer to something resembling normal, and the banks can see evidence of how the economy is developing, the second and third factors will become less important, and end mortgage rates will drop again. Then the BoE will decide whether to keep base rates as they are or raise them, although I suspect we are still quite a distance from that decision being made! 

Mark4444

princeofpounds said:

Perhaps I can help explain. When a bank lends out money, it needs to build in a number of components into its margins. The first is the cost of funding. Funding comes from a mix of sources, mostly customer deposits. But it is very strongly influenced by the BoE base rate. That has indeed gone down.

The bank also needs a margin to cover its anticipated cost of risk on that type of loan. This is the amount of loans they make that go bad and are not repaid. The banks need to be able to cover this so they can continue to pay all their depositors. Given the huge economic shock, projections of the cost of risk have understandably gone up.

The bank also needs to factor in a decent return on equity. To exist as a bank, shareholders need to put in equity capital. To grow the bank and credit available to the economy, shareholders need to be incentivised to leave profits in the bank to build up equity capital further. Equity capital exists for a few different reasons, but one of the main reasons is to ensure that if the cost of risk calculations turn out to be an underestimate, there is still some money in the bank to keep depositors whole. Shareholders are the first people to lose money when a bank makes a loss, and if they were not compensated for that risk, no-one would put equity into a bank. The 'cost' of this equity capital to the bank has also gone up. Partly because of the general uncertainty over economic conditions - the standard risk models don't really incorporate pandemics and so are less reliable than normal - and partly because other equity investments have all got a hell of a lot cheaper and so the 'opportunity cost' of bank equity is higher.

So far, the second and third factor appear to outweigh the first factor. That's one reason why the rate cut was so appropriate - if it had not happened, you would be facing even higher end rates. It's probable that as we move closer to something resembling normal, and the banks can see evidence of how the economy is developing, the second and third factors will become less important, and end mortgage rates will drop again. Then the BoE will decide whether to keep base rates as they are or raise them, although I suspect we are still quite a distance from that decision being made! 

Thank you for your detailed answer, very clear and appreciated. 

TripleH

To add, the bank will also focus on what they expect interest rates to be at the end of your fixed period. They are low now, but there is a reason for that, all expectation is that in the medium to long term, they will go in only 1 direction. 
There is also a cost to the bank to lending you that money (for example, if they lend to you for 5 years, they cannot lend that money to someone else at a higher rate in 2 years).

Comms69

Interest rates will go up, there's no doubt about that, cant really get lower (i mean you can get negative interest, but it's basically unheard of in modern western society)

But the economy will need stability. Massive interest hikes will not help as a short term solution. I would expect them to be fairly stable for next 5 years. 

Within 18 months you can expect national insurance to be scrapped, and replaced by a single tax system. That will be a key aspect of economic recovery. 

zagfles

princeofpounds said:

Perhaps I can help explain. When a bank lends out money, it needs to build in a number of components into its margins. The first is the cost of funding. Funding comes from a mix of sources, mostly customer deposits. But it is very strongly influenced by the BoE base rate. That has indeed gone down.

The bank also needs a margin to cover its anticipated cost of risk on that type of loan. This is the amount of loans they make that go bad and are not repaid. The banks need to be able to cover this so they can continue to pay all their depositors. Given the huge economic shock, projections of the cost of risk have understandably gone up.

The bank also needs to factor in a decent return on equity. To exist as a bank, shareholders need to put in equity capital. To grow the bank and credit available to the economy, shareholders need to be incentivised to leave profits in the bank to build up equity capital further. Equity capital exists for a few different reasons, but one of the main reasons is to ensure that if the cost of risk calculations turn out to be an underestimate, there is still some money in the bank to keep depositors whole. Shareholders are the first people to lose money when a bank makes a loss, and if they were not compensated for that risk, no-one would put equity into a bank. The 'cost' of this equity capital to the bank has also gone up. Partly because of the general uncertainty over economic conditions - the standard risk models don't really incorporate pandemics and so are less reliable than normal - and partly because other equity investments have all got a hell of a lot cheaper and so the 'opportunity cost' of bank equity is higher.

So far, the second and third factor appear to outweigh the first factor. That's one reason why the rate cut was so appropriate - if it had not happened, you would be facing even higher end rates. It's probable that as we move closer to something resembling normal, and the banks can see evidence of how the economy is developing, the second and third factors will become less important, and end mortgage rates will drop again. Then the BoE will decide whether to keep base rates as they are or raise them, although I suspect we are still quite a distance from that decision being made! 

OP was talking about Nationwide so equity isn't applicable, Nationwide is a mutual with no shareholders.

It'll be all down to risk. In the current environment there is a big risk of a sustained economic downturn which increases the risk both of the mortgage holder losing their job, and also house prices plummeting which could mean negative equity, ie the house is worth less than the loan.

You'll probably find lower LTV mortgages (eg 70% or less) aren't affected much if at all.