Weeks of turmoil on the financial markets have led to mounting pressure on homeowners as mortgage rates soar. More than 40% of all mortgage products were pulled after chancellor Kwasi Kwarteng's mini-budget last month triggered a slump in the pound and fears of further interest rate hikes.
The average two-year fixed mortgage rate is now close to 6% with a typical two-year fixed deal currently 5.75%, up from 4.74% on the day of the mini-Budget, according to financial information service Moneyfacts. The chancellor's mini-budget caused widespread panic in the markets after the government announced massive tax cuts including scrapping the top 45% rate and cancelling the increase to corporation tax.
The fall-out from the mini-budget led the government to perform a U-turn this week by cancelling its scrapping of the higher tax rate. While some mortgage lenders have since returned to the market with new deals experts have warned the government's about-turns are unlikely to lead to lower mortgage rates with uncertainty set to continue in the months ahead.
Read more: Martin Lewis' stark advice to first-time buyers who are ready to buy a house
With so much happening right now we've broken down everything you need to know about mortgages at the moment including why rates are rising, when they might go down, how long to fix for, and what you should consider if you're thinking about leaving your current deal.
What is happening with mortgage rates?
Rising mortgage rates are down to several factors. In September the Bank of England raised interest rates in from 1.75% to 2.25% – the seventh rise since December 2021 and the highest they've been in 14 years. This combined with the pound being volatile and general market uncertainty has led to the increase in rates we are seeing at the moment.
The impact of rising interest rates on mortgage holders is immediate and, for some, potentially severe. Increasing interest rates to 2.25% means that anyone on variable rate deals – such as base rate trackers – will see an almost immediate increase in the amount they repay each month. The Financial Times uses an example that a tracker rate rising from 3.5% to 4% will cost almost an extra £60 a month on a £200,000 loan.
Financial journalist Martin Lewis spelled out the huge impact this could have on your finances in a recent MoneySavingExpert newsletter where he said: “For each one percentage point your mortgage rate increases, expect to pay roughly £50 more a month (£600/year) per £100,000 of mortgage debt.” He added that rising rates “will likely push millions renewing when their fixes end into 'can't pay my mortgage' territory”.
With the uncertainty in the markets likely to continue as energy bills go up this winter and inflation remains high Mr Lewis also said there was "very, very little hope" of interest rates going down in the near future when asked recently on Good Morning Britain. He added that "we're hearing that interest rates could rise even higher in the year ahead".
Should I fix my mortgage now?
Analysis by specialist property lending experts Octane Capital suggests that the average homebuyer coming to the end of their mortgage term in the next year could see the cost of their monthly repayments rise by more than £300 a month despite having made three years' worth of payments.
Based on the current average rate for a three-year fixed term at a 75% loan to value the average homebuyer purchasing in today’s market would be looking at a monthly repayment of £1,125 based on the average mortgage rate of 3.74% and the current average house price of £219,089. Should the average mortgage rate climb to 6% in 2023 and house prices also dip by 5% to £208,134 as forecast the average home buyer would be facing a monthly repayment of £1,341 – some £216 more than they would if they were purchasing a property in the current market. However if house prices remain stagnant at the £219,089 level an average rate of 6% would see a property purchase in 2023 require a £1,412 monthly repayment – £286 more per month than the current cost of borrowing.
Rising rates have understandably led to people considering whether they should exit their current deal and find a better one. While it's difficult to predict exactly what will happen in the months ahead experts suggest that what you should do depends on what stage in your mortgage you're at.
If you are on a tracker or standard variable rate mortgage, and you know your new mortgage rate following the base rate increase, you should search around to see if money can be saved by switching to another deal. Many homeowners will be considering opting for fixed-rate mortgages for some financial stability.
CEO of Octane Capital, Jonathan Samuels, said anyone considering a three-year fixed term mortgage should do so now rather than wait. He said on Wednesday: “It’s been a very chaotic few weeks for the mortgage market and this unsettled landscape looks set to remain for the foreseeable future as the threat of further interest rate hikes looms large.
"Those looking to lock in a three-year fixed term today will be facing considerably higher repayment rates compared to three years ago with the average repayment now over £400 more per month. Despite this those considering a purchase are best advised to do so now as sitting on the fence could see you paying between £200 and £300 more a month come next year, with mortgage rates forecast to hit 6%.
"For those approaching the end of their three-year fixed term, now is also the time to lock in a fresh deal. Currently doing so will see you pay around £90 more a month but this cost is set to climb to almost £300 more per month for those due to renew next year."
According to MoneySavingExpert the rate on the cheapest 10-year fixed mortgage is actually lower than any two-year fix. This is much different to a year ago when interest rates on cheap 10-year fixes were just above 2% compared to less than 1% on both two-year and five-year fixes. But now that gap has narrowed and has even been reversed in some cases.
Martin Lewis said that those valuing certainty, and who don't expect to be moving home in the short term, might be better off looking at a fixed mortgage to avoid any further increases in rates. He said: "The advantage of a 10-year fix is simple: it gives you budgeting certainty. Specifically, you'll know exactly what you're going to pay each month – in other words, you can (hopefully) afford your mortgage. That certainty has a value in its own right, which is separate to how cheap the mortgage is.
"Of course, in these unprecedented times, nobody knows what's going to happen over the next decade. I certainly cannot promise that if you look back with hindsight in 2032 that this will have been the cheapest route. But because that situation is unknown instead of focusing on the external circumstances – such as where interest rates might be in future – look at your internal circumstances. Are you planning on staying in your home for the next 10 years? If you are, and what you value is certainty, then a 10-year fix has a real appeal because the rates are relatively cheap. The more you value certainty the more you should be thinking about fixing for longer."
For those whose deal is not due to finish for another couple of years the answer is less clear. Financial markets have few predictions for what might happen beyond that point so it's impossible to say whether exiting your current deal now is going to save you money in the future.
Of course the situation is changing almost daily and no-one knows how long the market will remain volatile for. The Bank of England said it doesn't expect inflation – currently 9.9% – to fall until next year and that it won't reach its target of 2% for another two years. After lenders pulled cheap deals after the mini-budget many have become available again. However this doesn't mean the same thing won't happen again in the coming months. The UK Government is due to reveal a medium-term fiscal plan on November 23 while the Bank of England has suggested interest rates will continue to rise in order to keep inflation under control. Both of these, as well as other factors such as the war in Ukraine, could lead to further disturbances in the market and it's likely that higher mortgages rates will persist for some time yet.
When it comes to whether you should leave your current mortgage early and find a cheaper rate this is heavily dependent on how long you have left on your deal, how much you'd pay as an exit fee, and how much you'd save by going onto a new rate. Investment magazine MoneyWeek gives an example where ending your deal early might actually save you money. Let’s say you have a £350,000 mortgage with a year left on a two-year fix at 1.2%. If the early repayment charge is 2% you would pay around £7,000 to exit the deal early.
If you then remortgaged onto a five-year fix of 3.99%, for example (assuming a 75% loan-to-value ratio), that would take your monthly repayments from your current £1,352 up to £1,845, assuming you have a 25-year mortgage term. Over the next 12 months your new mortgage will cost you £5,916 more than if you had stuck with your two-year fix plus the £7,000 early repayment charge. However if interest rates continue to rise you may end up paying even more. If mortgage rates hit 5% when you come to refinance in a year you could end up paying £2,046 a month over five years – an extra £12,060 over the life of the product. This means it could make sense to leave early and lock in a lower rate now.
Doing this comes with risk though as the further away from the end of your mortgage you are the more you'll pay in exit fees. Depending on what rates are available for you to switch to any savings you'd make from going onto a lower rate might be cancelled out by your early repayment charge There is also the daunting prospect of paying so much money just to end your mortgage term and for many households this will be unaffordable in the current cost of living crisis.
What are the best rates on the market at the moment?
With mortgage rates changing almost daily at the moment reporting the best current deals accurately is tricky. The website Moneyfacts, which regularly collates the latest rates, shows that the cheapest fixed rate is for 10 years. You can check the full rates from different providers on their comparison page here. The below figures are based on a property valued at £200,000.
Loan-to-value 60%
Two-year fix: 4.91%
Three-year fix: 5.89%
Five-year fix: 4.45%
10-year fix: 4.09%
Loan-to-value 75%
Two-year fix: 4.95%
Three-year fix: 5.89%
Five-year fix: 4.48%
10-year fix: 4.24%
Loan-to-value 90%
Two-year fix: 4.20%
Three-year fix: 5.94%
Five-year fix: 4.04%
10-year fix: 5.49%
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