Mortgage lenders betting on a sharp slowdown

The mortgage market seems to be adjusting to the danger of slowing growth when the rush for public money ends.

Fixed rate mortgages are governed by what lenders think is likely to happen to Bank of England interest rates in the coming years. Five-year patches are almost always more expensive than two-year patches because they provide better security.

But at 3.01%, the average five-year loan is now just 0.15 points higher than the typical two-year mortgage of 2.86%.
Halifax has even launched a five-year fixed rate loan that is cheaper than its two-year contract rate.

This suggests that some market participants fear the economy may be slowing down. This will force the Bank of England to stop raising rates or risk doing serious damage.

Experts also said fierce competition among lenders and banks’ risk appetite could also be behind the unusual move.

Simon Rubinsohn, chief economist at surveying trade body RICS, said the move either “there’s not a lot of pessimism about rising interest rates, or there could be more pessimism as for the economy because they have to go down”.

He added: “What you see there is a pretty flat picture and it tells me that the market expects interest rates to rise a bit more. [and] not expecting them to be aggressive.

Andrew Wishart, real estate economist at Capital Economics, said changes in lending rates for homeowners reflect developments in broader financial markets, but also more specific mortgage trends, such as risk appetite.

Economists have warned that low levels of growth mean the UK economy is now at risk of contracting as spending is hammered by the rising cost of living.

The weak GDP growth in February was partly the result of a drop in testing and tracing and vaccination activities.

Vaccination spending fell 65% during the month as pressure for omicron wave-boosted booster shots waned.

James Smith of ING said: “The end of the UK Covid-19 booster and testing campaigns weighed on growth in February and will continue to do so over the coming months. Combined with the cost of living crisis, declining confidence and the presence of an additional holiday, we expect second quarter growth to be slightly negative.

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