Where the money from your mortgage goes

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Good afternoon and welcome to this week’s Home Front.

If you have had a mortgage come up for renewal during the last few years of fluctuating interest rates, you’ll know the pain of seeing your repayments rise all too well.

But where does the extra money you are handing over to your bank go?

It is a good time to ask the question. Later this week, the Bank of England’s Monetary Policy Committee (MPC) will meet to decide what to do about interest rates. For anyone with a mortgage, credit card or loan, plus people who would like to buy a home for the first time, what happens next to the cost of borrowing matters.

Recently mortgage rates have gone from their post-2008 crisis near-zero comfort zone to far more unaffordable territory, stabilising at around 4 per cent.

The Bank’s current rate is 4.5 per cent and it is expected to stay there as inflation – the rate at which prices and the cost of services rise – is back on the up. This time, that’s primarily because of higher energy prices, water bills and bus fares.

When inflation rises, it makes it less likely that the Bank will cut rates, as it did at the last meeting from 4.75 to 4.5 per cent. This is because the Bank wants to stabilise the economy and prevent inflation from taking hold once again.

If you were on a fixed-rate mortgage of 1, 1.5 or, say, 2 per cent and you now find yourself looking at rates which are double that, you might be wondering where the hundreds of pounds extra you are charged per month actually end up.

The truth is that mortgage lenders – including banks and building societies – are businesses like any other. And they want to be profitable.

Andrew Montlake, a mortgage and finance expert with more than 30 years of experience, points out that “we want them to be profitable too – remember what happened in 2008″.

There is a difference, of course, between banks and lenders making a profit and paying their employees the sort of enormous bonuses, and between covering their own costs, which may pass onto consumers.

Their costs might go up because of global factors as well as issues closer to home like the cost of labour and running a business.

But banks mainly change their rates in accordance with how much it costs them to borrow funds to lend as mortgages. When the Bank’s rate is higher, borrowing costs are generally higher for banks, too. Think of the Bank’s rate as a benchmark for interest rates across the UK.

Some banks and lenders borrow money from investors in order to lend people money to buy homes. This process is governed by swap rates, which are also influenced by the Bank’s rate.

Swap rates are the interest rates agreed by two parties on a loan, such as an investment for mortgage lending. They are essentially forecasts which consider how high or low interest rates will be in the future. If the Bank’s rate goes up or, as is expected this week, fails to come down, it may mean that swap rates increase. And, if they do, the rate that a bank or mortgage lender lends to a homeowner will likely go up too.

However, Montlake notes that some lenders – such as high street banks – will “borrow money from either their own savers [for mortgage lending], so it’ll be affected by the savings rates, and if interest rates are higher for longer, then that means that mortgage rates have to be higher because they have to offer higher rates to savers and then lend it out at a certain level”.

Montlake adds that other factors, such as Donald Trump’s threat of tariffs on the UK, can also influence these rates.

“The main thing at the moment is uncertainty around what will happen next,” he explains. “We’ve been in a very volatile environment where you’ve had a pandemic, war in Ukraine and now the complete variable of Donald Trump.”

Amid all of this uncertainty, one thing seems to be an emerging constant: higher interest rates.

Montlake thinks it is unlikely that we will see much lower rates any time soon because of the external pressures already discussed.

Is there any good news? Well, yes. In some ways, the mortgage market we have today is far more stable than the one that existed before 2008.

Mortgage-backed securities – where mortgages are bought and sold on the open financial markets for profit – are far less common than they used to be.

“It’s not the Wild West anymore,” Montlake says. “Mortgage lending is now tightly regulated, and for good reason.

“Lenders will tell you that they don’t make the margins they used to make on mortgage lending, though, as a result. Tiny violins at the ready, I know.”

So, there you have it. The extra money you pay when your mortgage goes up is probably covering your bank’s costs and making sure they remain solvent. It is painful to see your monthly repayments going up but, at the same time, a return to rapid inflation or, indeed, another financial crisis would be all the more painful.

Key housing

Speaking of Trump, I thought it would be worth spotlighting an interesting housing intervention from his new administration.

The US President has signed an executive order which requires public administrators to “promote beautiful federal civic architecture”.

There is often a preoccupation with “beauty” on the political right. You may remember that under the previous Conservative government in the UK, all new buildings were required to be “beautiful”, too. This was generally interpreted as being mock-Georgian or neoclassical like King Charles’s pet project, the Poundbury Estate.

But who decides what is and what is not beautiful? To some, brutalism is beautiful and mock Tudor terraces are a travesty.

Once in power, Labour scrapped the Tories’ rule that new developments needed to be “beautiful”, arguing that it “blocked” new buildings.

Deputy Prime Minister and Housing Secretary Angela Rayner said the rule was too “subjective”.

Beauty, as the saying goes, is in the eye of the beholder so why do some politicians interpret all that is beautiful as being reminiscent of “classical architectural heritage” like that of Ancient Rome and Greece?

Once, surely, those structures were eyesores to someone, somewhere too?

Are there any buildings you think are “beautiful”? Or any that you don’t? I’d love to hear from you vicky.spratt@inews.co.uk

Ask me anything

This week’s question has come from a landlord. They want to know what they can do about the fact their tenants, who are moving out, have not professionally cleaned the home they’re handing back?

In this instance, I would draw your attention to the Tenant Fees Act 2019.

The law states that landlords in the UK cannot legally charge tenants for end-of-tenancy cleaning services or require them to use a specific cleaning company.

However, this does not negate tenants’ responsibility for cleaning a home before they leave. They will still be responsible for ensuring it is returned to the landlord in the same condition as when they moved in.

This is usually laid out in the tenancy agreement – which may say something like “tenants must leave the property in the condition they found it” – and can be contractually enforced.

So, to sum up: no, you cannot require your tenants to pay for professional cleaning. Yes, you can require them to leave the home as they found it, minus standard “wear and tear”.

Send in your questions to: @Victoria_Spratt, on X, formerly Twitter, @vicky.spratt on Instagram or via email vicky.spratt@inews.co.uk

Vicky’s pick

Last week, I was lucky enough to be a guest of the Longford Trust at a performance of Punch, a play at the Young Vic in London.

The Longford Trust supports ex-prisoners to gain a university education, offering scholarships of up to £5,000 per year to serving and ex-prisoners to take degree courses.

Punch is a play, based on a true story, about a young man who punches another young man on a night out. The victim suffers a brain bleed days later and dies. The perpetrator is sent to prison where he goes on a journey of owning his behaviour and, ultimately, embarking on rehabilitation.

Punch was a thought-provoking story about redemption which, ultimately, asks whether forgiveness can, or should, ever be possible?

I still don’t have the answer to that question but I would encourage you to see the play.