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Mortgage costs are rising – with the average rate on a two-year fixed contract now 5.5% – despite a recent drop in interest rates.
A string of lenders, including Barclays, HSBC, NatWest and Nationwide, have increased rates on new fixed-line deals in recent days.
This created a headache for borrowers who had hoped costs would follow a steady downward trend, particularly in light of the Bank of England cutting its benchmark interest rate earlier this month.
Recent events, such as the Budget, mean that borrowing costs in general have increased, which could impact those looking for a home loan.
How Mortgage Rates Affect Borrowers
Some tracker and variable rate mortgages move quite closely to the Bank's base rate. However, more than eight in ten mortgage customers benefit from fixed rate contracts.
The interest rate on this type of mortgage does not change until the transaction expires, usually after two or five years, and a new mortgage is chosen to replace it.
About 800,000 fixed-rate mortgages, currently with an interest rate of 3% or less, are expected to expire each year on average through the end of 2027.
Hundreds of thousands of potential first-time buyers are also hoping to secure their own home with their first mortgage. Everyone would support low mortgage rates.
There have been two significant spikes in the past two years, with the average rate peaking at 6.85% in August 2023, according to financial information service Moneyfacts.
Rates are now lower, but transaction costs have increased on both sides of the budget.
The average rate on a two-year transaction is now 5.5% and that on a five-year transaction is 5.22%.
Almost all the cheapest offers on the market, often aimed at those able to offer a large deposit, have gone back above a rate of 4%.
Why are interest rates falling while mortgage rates are rising?
On November 7, the Bank of England cut the base rate – which influences the wider cost of borrowing for businesses, individuals and the government – from 5% to 4.75%.
This was widely expected, which is why the markets had already taken this reduction into account in their calculations. In other words, it was so widely anticipated that borrowing costs had already been adjusted accordingly.
However, the Bank of England also said that future interest rate cuts may not come as often or as quickly as previously thought.
In the words of one mortgage broker, this is because the Budget presented by Chancellor Rachel Reeves “put a spoke in the wheel”. Spending promises risked inflating some prices, something high interest rates are supposed to control.
Bank governor Andrew Bailey said rates were likely to “continue to fall gradually from now on” but warned they could not be cut “too quickly or too significantly”.
Lenders evaluate their mortgages not only based on where interest rates are at any given time, but also where they and the financial markets expect them to be in the future.
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Brokers say the outlook has changed for lenders given the bank's latest view on interest rates, which prompted the most recent mortgage rate changes.
“The flurry of rate changes in recent weeks has continued to push (mortgage) rates higher, reflecting higher costs for lenders, as the market outlook for rates has shifted to 'more' expectations. higher for longer,'” said David Hollingworth of the mortgage industry. L&C broker.
“As unfortunate as this may be for borrowers, it is important to note that there is no sign of rates rising as they have in recent years. The Bank of England's base rate is expected to still decline over time, but markets are wondering if the pace will be as fast as expected.”
A Treasury spokesperson said the Budget “puts the public finances on a sustainable path” and that this was “essential to securing stable mortgage rates for all homeowners”.
What goes up might come down
The general trend in interest rates is expected to be downward, but the timing may be difficult for borrowers.
This is all the more difficult as mortgage transactions currently have a relatively short lifespan, due to uncertainty.
“The best buy deals that stand out don't last very long,” said Aaron Strutt, of broker Trinity Financial.
“If your mortgage is up for renewal and you're sticking with your current lender, you need to keep an eye on rates, as lenders don't tend to let borrowers know when they're going up.”
Ways to Make Your Mortgage More Affordable
Make overpayments. If you still have time to qualify for a low fixed rate deal, you may be able to pay more now to save later. Opt for an interest-only mortgage. This can keep your monthly payments affordable, even if you won't pay off the debt you accumulated when you purchased your home. Extend the term of your mortgage. The typical term for a mortgage is 25 years, but terms of 30 and even 40 years are now available.
Learn more here.
