Building societies could be forced to stop offering fixed rate mortgages for months as soaring lending costs cause havoc among smaller lenders, brokers have warned.
Some of the UK’s biggest mortgage lenders, including Skipton Building Society, Virgin Money and Paragon Bank, have withdrawn new mortgage products this week due to spiralling borrowing costs.
Smaller lenders are more exposed to swings in wholesale interest rates than larger high street banks, which lend off their deposit bases.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “The big banks will still be able to provide fixed rates but smaller lenders will face more severe challenges and might not be able to provide fixed rates for months.”
He added that smaller lenders “are in for a bumpy ride” until the end of November when Kwasi Kwarteng, the chancellor, outlines his new fiscal rules and “the market is given more clarity”.
“It’s going to be very difficult for the next eight weeks,” Mr Harris said.
Ray Boulger, an analyst at mortgage broker John Charcol, also said smaller lenders will be slower than bigger rivals to go back to offering fixed rate mortgages as they will want to wait for the market to settle down.
He added that some mispriced deals would only have a small impact on larger lenders due to the size of their mortgage books, whereas they could have a much bigger impact on small lenders.
The warning comes as government borrowing costs continued to rise on Tuesday, with the benchmark 10-year gilt yield climbing above 4.5pc for the first time since 2008.
Lenders use so-called swap rates, which are dictated by gilt yields, to mitigate interest rate risk in fixed-rate mortgages. The surge in gilt yields since Mr Kwarteng’s budget last Friday means that the cost of borrowing has soared for lenders.
On Monday, Nigel Terrington, chief executive of FTSE 250 mortgage lender Paragon, told the Financial Times: “We pulled our new fixed-rate deals today because they’re all priced off swap markets, and they have risen dramatically in the past 48 hours.”
Shares in Paragon fell nearly 5pc on Tuesday and are down by more than a fifth in the last month.
Mr Harris said: “The big banks will have a vast array of different hedging strategies across their balance sheets so they can cope with the volatility better than smaller lenders.”
On Tuesday, larger lenders including HSBC and Santander also suspended new mortgage deals amid the market turmoil.
Mr Boulger said: “Every UK lender will be pulling deals this week and repricing them if they’ve not already done so.”