Santander first major lender to increase mortgage rates this year

Santander has become the first major lender to increase mortgage rates this year after last week’s surprise rise in inflation.

After launching a headline five-year fixed-rate mortgage with an interest rate of 3.89pc just two weeks ago, the high street lender has now increased rates by up to 0.20 percentage points across a range of deals.

Inflation rose to 4pc in December, according to official data published last week, up from 3.9pc the previous month. Markets had priced in a fall to 3.8pc.

The news nudged up the yield on government bonds – which banks use to set long-term lending rates – and prompted mortgage brokers to predict a pause in the price war that kicked off in the new year.

Aaron Strutt, of brokerage Trinity Financial, said Santander’s mortgages had been among the cheapest and that even with this increase their home loans remained good value for money.

He added: “There is a huge amount of competition in the market now and if a mortgage lender increases rates, one of its competitors will be keen to take the business.

“Two-year fixes currently start from 4.08pc and five-year fixes from 3.84pc. We have been saying for a while that rates may start to level off and that there may not be many more price reductions for a while – but the pricing improvements keep coming.”

This week, Nationwide announced it would shave off up to 0.81 percentage points from its fixed rates, making it one of the last high street lenders to cut mortgage rates this year.

Robert Gardiner, chief economist at Nationwide, said the uncertainty in swap rates – a leading indicator for mortgage rates – was being driven predominantly by uncertainty over what will happen to the Bank Rate at next week’s meeting.

Swap rates have wobbled over the past seven days, rising and then falling again following the surprise rise in inflation.