BoE: Mortgage rates may increase in 2012

Mortgage rates may increase in 2012 as banks pass on higher funding costs, the Bank of England reports.

In its financial stability report released today the Bank says wholesale funding costs will rise leading to higher mortgage rates.

It states: “At the beginning of the financial crisis, when funding costs rose sharply, banks were relatively slow in updating the price of new mortgages and the residual remained negative for around a year. This suggests it may be during 2012 that any significant increase in banks’ lending rates occurs.”

It adds: “While credit availability was reported to have increased slightly in 2011 Q3, particularly for high LTV mortgages, subsequent market intelligence suggests that, as with corporate lending, some banks may be starting to pass on higher funding costs to mortgage customers through higher prices.”

It claims the spreads between funding costs and pricing has grown making mortgage lending less profitable since 2009.

It also says lenders with a higher stock of retail deposits may be more insulated from the marginal cost of wholesale funding.

It states: “These lenders may price on the basis of the average costs of retail and wholesale funding. But market intelligence suggests retail funding costs are being bid up too, as banks attempt to attract more retail deposits and reduce their reliance on wholesale funding. This suggests pass-through will eventually occur.”