Lenders withdraw fixed-rate mortgages

19 April 2007

Lenders have started to withdraw their fixed-rate mortgages, in preparation for a possible rise in interest rates. 

Alliance & Leicester pulled its fixed-rate deals on Wednesday, and it’s likely that other major mortgage lenders will now follow suit.  Lenders often withdraw mortgages when interest rates rise.  They base their borrowing costs on money market rates, which in turn are linked to the Bank of England’s rate.

So why is a rise in interest rates likely? On Wednesday, UK inflation rose to 3.1%, which is more than 1 per cent above the Government’s target of 2%.  This meant that the Governor of the Bank of England was forced to write to the Chancellor, explaining why it had happened.  In his letter, Mervyn King said he was “determined” to bring inflation back down to 2%. 

With this in mind, many analysts now believe that the Bank will put interest rates up in May.  A rise in the base rate will feed through into the money market rates, pushing them higher, too.  This will result in higher costs for lenders and they will pass these on to consumers. 

At the moment, many lenders are offering rates below the money market rate – and this is unlikely to continue against a background of rising interest rates.