End of TFS could signal the end of the low mortgage rates era

Bank of England

End of Term Funding Scheme could signal the end of the low mortgage rates era

Next week sees the end of the Bank of England’s Term Funding Scheme (TFS) and with it, the increased likelihood that mortgage lenders are going to have to put up mortgage rates.

With the Bank of England already hinting that it may need to raise the base rate sooner than previously thought, mortgage lenders are also coming to terms with the end of the Term Funding Scheme (TFS) and the impact this could have on their funding options.

The TFS was introduced by the Bank of England in 2016, to provide mortgage lenders with additional funding, which has to be paid back within four years of drawdown. This began just after the Brexit vote and was designed to provide stability to the mortgage market, allowing lenders to offer competitive rates.

As Commercial Trust Limited reported in Property Division last week, lenders have borrowed over £106 billion through TFS. Not only will this money have to be paid back, but it means mortgage lenders will need to look at other ways to fund their lending going forwards.

Rachel Springall from Moneyfacts this week commented on the end of the TFS:

“A big influence on pricing could be next week’s closure of the Term Funding Scheme (TFS). The cheap funds made available through government lending initiatives to mortgage providers will eventually dry up.

“There is a four year window set in place for the last drawdown, so the clock is officially ticking on how long lenders can prolong the lowest rates.”

But the threat of higher interest rates could also come from a third influence, swap rates.

Mortgage Solutions recently reported that there had been a recent surge in swap rates, which affects the cost of mortgage funding for lenders, warning that this was likely to be introduced to mortgage costs imminently.

The article, published on February 14th, stated:

“A lender this week told Mortgage Solutions that providers usually have enough funding to hang on for two or three weeks before they are forced to move – or accept lower margins.

“It is now a case of each provider waiting to see who makes the first move.”

Already, it reported, there had been product repricing activity from Halifax, Nationwide, the Post Office and Tesco Bank.

Charlotte Nelson from Moneyfacts.co.uk, stated:

“The talk of multiple base rate rises this year has started to become more than just gossip, with swap rates starting to rise again.

“The two-year swap rate increased by 0.15% in just one month, which is particularly significant, as this was an early sign of the base rate rise that occurred last November.”

Springall added:

“It’s unavoidable that lenders will have to start pricing in fluctuations in long-term SWAP rates and start to adjust their range, in order to cope with the changing economy.

“Borrowers may have started to see lenders adjust their mortgage pricing over the last few weeks, which is due to the speculation of an interest rate rise by the Bank of England to take place earlier than expected in 2018.”

Andrew Turner, chief executive at Commercial Trust Limited, commented:

“The end of TFS could be an influencing factor on future mortgage interest rates, but lenders have four years to introduce changes, so there is nothing to suggest this issue will cause an imminent rise.

“By contrast, swap rates do appear to have had a more immediate impact - just this week we have been contacted by a lender who announced they will be increasing their rates as a result of swap rates.

“Should this be cause for alarm? No. It simply means that, if you have not recently reviewed your mortgage finance, now is a greatly opportune time to do so. Why? Other lenders may well increase their rates too, so looking at remortgage options right now, whilst low rates prevail, could set landlords up for success in the coming years.”

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.