About three quarters of the UK’s 20 biggest lenders have increased rates since the end of May
Mortgage rates are rising again and products are being pulled from the market amid higher-than-expected inflation figures.
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Since 24 May, when the inflation figures for April were above analyst forecasts at 8.7%, the average two-year fixed deal has increased by 0.38 percentage points to 5.72%, according to Moneyfacts.
“This volatility is down to the concerns surrounding future interest rate hikes, and lenders are reassessing their propositions,” said Rachel Springall, finance expert at Moneyfacts.
This comes after interest rates charged on home loans skyrocketed from the “historic” lows of less than 1% last October to a peak of around 6% after the former chancellor Kwasi Kwarteng’s September mini-budget threw housing and financial markets into “disarray”, said The Guardian.
Pricing has come down since Jeremy Hunt replaced the sacked Kwarteng as chancellor and Rishi Sunak succeeded Liz Truss as prime minister. But property experts are warning that mortgage rates risk climbing further, said Bloomberg, if markets firm up bets on the Bank of England continuing to hike the cost of borrowing in an effort to tackle rising inflation.
Many homeowners will be protected from these rises if they are currently on a fixed-rate mortgage but they face a “painful, though hopefully not ruinous, payment jump” if their existing deals expire this year, wrote John Stepek at Bloomberg’s Money Distilled.
Most of these borrowers currently pay less than 2% interest after fixing their mortgages during the ultra-low interest rate environment of the pandemic, said Moneyfacts. “This means when they come up for renewal, they could see their rate more than double.”
All of this is making life more difficult for homeowners, and those hoping to get on the property ladder.
What determines mortgage rates?
Lenders consider a range of factors when setting their mortgage rates.
One factor is the cost of borrowing, known as the interest rate, which is set by the Bank of England (BoE) base rate.
If the BoE’s interest rate rises, home loans will usually become more expensive as lenders “pass on the increase in the bank rate to their customers”, said MoneySuperMarket. So a higher base rate usually translates to higher monthly mortgage payments.
Another consideration is the cost the banks face for obtaining funds to lend on the financial markets, which is based on swap rates. These are “the yardstick by which they lend money to each other”, said the i newspaper.
When swap rates are higher, the newspaper explained, lenders push mortgage rates up so they can maintain a profit.
Are mortgages still getting more expensive?
Sunak has pledged to halve inflation this year, but with the cost-of-living measure still so far above the Bank of England’s 2% target, analysts are anticipating further interest rate rises.
The BoE’s Monetary Policy Committee raised interest rates from 4.25% to 4.5% in May 2023, prompting further warnings that mortgage pricing will rise in response.
Rates were thought to have peaked, said Sky News, but the Bank of England's base rate is now expected by markets to reach 5.5% by November and to remain elevated until February 2024.
“Price rises did not slow as much as the Bank hoped and core inflation, which strips out volatile energy and food prices, is at a 30-year high,” Sky News said. That anticipated increase is being priced in by lenders when evaluating the mortgage rates to offer new customers.
About three quarters of the UK’s 20 biggest mortgage lenders have increased mortgage rates since turbulence in financial markets began on 24 May, according to The Times.
Many UK homeowners are on fixed-rate deals, meaning their monthly payments remain the same for a set period of time. For these borrowers, the interest-rate changes “will have no effect on their mortgage rate in the short term”, according to banking trade body UK Finance.
But more than 1.4 million households in the UK are facing the prospect of “a significant increase in their monthly mortgage payments” when they have to refinance, Bloomberg’s Stepek said.
The majority of mortgages coming up for renewal in 2023 were fixed at interest rates below 2%, according to the Office for National Statistics (ONS). If someone with a £100,000 mortgage sees their rate jump from 2% to the “reasonably conservative” estimate of 4%, Stepek explained, “that would add £100 a month to your payments, a 25% increase”.
Average mortgage interest rates are expected to settle at between 4% and 5% this year, assuming “inflation has peaked and the Bank of England will slow its base rate rises as a result”, said This Is Money. Experts expect the BoE to ease up on the base rate in the second quarter of 2024, Bloomberg reported.
Lenders could lower rates even further if the base rate peaks at around 4.5% soon, below the 6% initially projected in September 2022. But even so, rates are “likely to remain sticky”, said Bloomberg economist Niraj Shah. “We may have to get used to a ‘new normal’ as we are unlikely to see the ultra-low interest rates we had all got used to.”
Which mortgage should you choose?
There are two main mortgage products: fixed rates and trackers.
Fixed-rate borrowers pay a set amount each month for a defined period, which can make it easier to budget and means your payments remain steady even if interest rates rise, said Money.co.uk.
This may sound attractive when rates are low, but “think carefully before committing for too long as some fixed-rate mortgages may have an early repayment charge”, the financial website said. Plus, if interest rates go down during the fixed-rate period, your payments won’t, the website added.
A tracker mortgage usually follows the BoE’s base rate. Tracker rates are currently priced lower than fixed deals, but there is always the risk that rates will rise even higher, “leaving you gambling if you don’t fix, because then you will be at the mercy of a higher tracker, therefore higher mortgage repayments”, warned Online Mortgage Advisor.
One way for borrowers to “try and ensure stability in their home finances” is to “think long-term when selecting their mortgage deals”, as the rates are usually lower than shorter fixes, said Unbiased.
Some buyers may be tempted to wait and see if mortgage rates drop further this year, but not everyone thinks that is a good idea. Borrowers who sit tight hoping for continued reductions will “need to think about how a rising base rate will affect their holding position”, David Hollingworth of L&C Mortgages told the i news site.
How to boost your chances of getting your mortgage approved
Lenders will typically use an income multiple of 4 to 4.5 times salary per person when assessing a mortgage application, sometimes rising to 5 or 5.5 times for higher earners, said The Times Money Mentor, but you will need to pass tough affordability tests.
This involves examining your income and outgoings. So “the more money you spend each month, the less you might be able to borrow”, the website said.
You can boost your chances of getting a mortgage by checking your credit report – a record of all your debts such as loans and credit cards and how good you are at making repayments.
These reports are compiled by providers such as Experian, Equifax and TransUnion and calculate a credit score based on the debts you have and your repayment history as well as whether you have ever been made bankrupt or received county court judgments.
The report gives a lender an idea of whether you are a responsible, reliable borrower and likely to repay the debt. “Usually, a higher score means you’re seen as lower risk,” said Experian.
You can improve your creditworthiness by making payments on loans, credit cards and bills on time and by getting on the electoral register so lenders can verify who you are, said Equifax.
Be careful, though, as making lots of applications may suggest to lenders that you are reliant on credit, so if you plan on applying for a mortgage, “it might be helpful to be selective about what other loan applications you make”, Equifax added.
First-time buyers and renters looking to get on the property ladder have recently been given new hope with the return of 100% LTV mortgages. Skipton Building Society has launched a no-deposit mortgage aimed at tenants who can show a good track record of paying rent.
The rate is 5.49% for five years, which is “quite a premium” to pay for not having a deposit, MoneySavingExpert said, plus you can only borrow the equivalent or less than you pay in rent.
How to find support if you are struggling to pay your mortgage
Around 350,000 households “could face payment difficulties by the end of June 2024”, City watchdog the Financial Conduct Authority has warned, due to interest rate changes and the cost-of-living crisis.
UK Finance has said lenders are committed to helping customers who might be struggling with their mortgage payments, “with a range of tailored support available”.
The organisation said anyone who is concerned about their finances “should contact their lender as soon as possible to discuss the options available to help”, reported Yahoo Finance.
Support may include temporary payment arrangements, lengthening the term of your mortgage, or switching temporarily to interest-only repayments, said MoneyHelper.
You can also get free housing advice from Shelter and support on managing debts from charities such as National Debtline and StepChange, added MoneyHelper.
Benefit claimants, such as those on Universal Credit, may be able to get help with some of their monthly repayments through the government’s Support for Mortgage Interest (SMI) scheme.
Before making major mortgage changes, brokers suggest making personal spending cuts. “Many of us are more financially stable than we think we are when we look closely,” Carmen Green, mortgage and protection adviser at Xpressmortgages, told FT Adviser. “Changing to interest-only or taking payment holidays could just delay the problem for many, rather than solve it.”
Marc Shoffman is an award-winning freelance journalist, specialising in business, property and personal finance. He has a master’s degree in financial journalism from City University and has previously written for FTAdviser, ThisIsMoney, The Mail on Sunday and MoneyWeek.
