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Article posted: 9/22/2013 6:25 AM

Rock-bottom mortgage rates evaporating on recovery in U.K.

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By Bloomberg News

Rock-bottom mortgage rates may be a thing of the past in the U.K. as banks' borrowing costs surge amid growing evidence that an economic recovery is taking hold.

Five-year swap rates, the cost lenders pay for fixed-rate money, have risen since mid-July and climbed above 2 percent on Sept. 5, the most since August 2011, data compiled by Bloomberg show. On July 31, the rate was about 1.40 percent.

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HSBC Holdings Plc's First Direct and Yorkshire Building Society, a customer-owned lender, are among those raising their rates for five-year fixed-term mortgages, according to Knight Frank Finance, a London mortgage broker. Fixed-rate costs for banks are rising as Britain heads for its fastest growth since the start of the financial crisis, spurring speculation that tighter monetary policy may come sooner than expected.

"For anyone who is remortgaging, this is the time to lock in and get the best rates," said Dominik Lipnicki, founder of Your Mortgage Decisions, a Surrey, England-based mortgage broker. "This is the beginning. I don't think it will be temporary."

U.K. unemployment dipped to 7.7 percent in the three months through July from 7.8 percent in the second quarter, statistics released last week show. The Bank of England has said it may consider raising its key interest rate from a record low 0.5 percent, where it has been since March 2009, when the jobless rate shrinks to 7 percent.

Gilt Losses

Gilt yields have also risen in anticipation of higher rates, sending bond prices lower. U.K. government lost 4.5 percent this year compared with a 3.7 percent drop for Treasuries and a 2.5 percent decline for German debt, according to Bloomberg World Bond Indexes.

Gross U.K. mortgage lending climbed 12 percent in July to 16.7 billion pounds ($27 billion) from a month ago, the U.K. Council of Mortgage Lenders said last week. There are 11.3 million mortgages in the U.K., with loans worth over 1.2 trillion pounds, according to the industry group.

First Direct, HSBC's online and telephone-banking unit, raised its rate on 90 percent loan-to-value five-year fixed mortgages to 4.39 percent from 4.19 percent last week, according to Knight Frank Finance and Your Mortgage Decisions.

Yorkshire Building Society said it has raised its rate for 65 percent loan-to-value five-year fixed-rate mortgages to 2.59 percent from 2.54 percent. The lender said its more expensive mortgages are a direct result of five-year swap rates.

Housing Revival

"Overall, the cost of mortgages remains at historically low levels," the Bradford, England-based lender said in an e- mailed statement.

HSBC, Europe's biggest bank, declined to comment on its mortgage pricing.

The low mortgage rates have helped spur a housing revival. U.K. house prices climbed for the seventh month in August and will probably continue to increase through the rest of the year, according to a report by Halifax, the mortgage unit of Lloyds Banking Group Plc. Home values increased 0.4 percent from the previous month to an average 170,231 pounds, Halifax said. From a year earlier, prices were up 6.2 percent.

"We have certainly reached the bottom of where fixed rates can go," said Simon Gammon, managing partner at Knight Frank Finance, which is an arm of Knight Frank, a U.K. real-estate agency. "Now it's really a question of where they start to build momentum. Swap rates are going to pick up."

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