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We’re seeing a similar process with mortgages, to the detriment of borrowers. In the last few weeks, a number of banks have announced increases to the standard variable rates for their mortgages. Halifax is to increase its rate from 3.5 per cent to 3.99 per cent; RBS from 3.75 per cent to 4 per cent; Santander just a 0.1 percentage point increase; and Bank of Ireland from 2.99 per cent to 3.99 per cent. A Halifax spokesman explained it thus: ‘The increase to the rate reflects the fact that raising money through retail savings and in the wholesale markets is currently very expensive by historical standards.’
The chart below shows the yield on 5-year government bonds in white and the average borrowing costs for a 5 year fixed mortgage in orange. Clearly, the two borrowing costs move together – when the
gilt yield falls, mortgage costs fall, and vice versa. But note that since Autumn 2011 the average 5-year fixed mortgage rate has actually increased, whereas UK gilt yields have fallen. That has
not happened since 2007. So mortgage rates are increasing despite the gilt yield falling:
All of which is to say, the problems of the UK banking industry are helping to rebalance the position of savers and borrowers. British savers are seeing higher interest rates for their cash and
mortgage holders are having to pay higher costs for their debt. However, forecasters do not expect the Bank of England to increase rates for at least another two years, so any benefit to savers is
marginal at best. And if British homeowners have to pay more on their mortgages, then that is bad for the UK economy too, given that we are — thanks largely to debt — a home-owning
nation.
Hamlet’s Polonius may have said ‘Neither a borrower nor a lender be,’ but with base rates at 0.5 per cent, it is still best to be a borrower — even if the balance is shifting slightly.
Louise Cooper is a senior financial analyst at BGC Partners.
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