Latest figures show that the average 2-year fixed-rate mortgage deal has exceeded 6% for the first time since rates peaked towards the end of 2022. In this article, we explain what is happening to mortgage interest rates, what this means for borrowers and what you can do if you are affected by increasing mortgage rates.
What is happening to mortgage interest rates?
Mortgage interest rates had started to reduce over the first quarter of this year, however, they have been steadily increasing since the end of April. Figures from the retail financial product data provider, Moneyfacts released today announced that the average 2-year fixed rates for mortgage deals are now more than 6%. It is still possible to find 2-year fixed-rate mortgage deals that are below 6% and you should check for the best deals based on your borrowing needs by using our Mortgage Rate Comparison Tool.
Why are mortgage interest rates increasing?
Mortgage interest rates soared after the mini-budget of September 2022 causing concern amongst lenders who then reacted by pulling a number of mortgage deals and returning to market with increased rates. Mortgage interest rates continued to increase until the end of 2022, following a number of base rate rises and were further impacted by inflationary pressures brought about by rising energy and food costs.
Mortgage rates began to fall in early 2023, however, April's higher-than-expected inflation figures caused further uncertainty in the mortgage market. As a result, a number of lenders have been repricing mortgage interest rates for various deals including 2-year fixed and 5-year fixed rates. Last week saw banks withdrawing more mortgage deals before returning to the market with increased interest rates for new mortgage applicants and those applying to remortgage.
What does it mean for borrowers?
Remortgagers
Mortgage borrowers who are coming to the end of a fixed-term mortgage deal are likely to experience a hike to the rate of interest they will pay, causing their monthly mortgage payment to rise. Interest rates had been persistently low following the 2008 financial crisis and rates only started to rise in late 2021. As a result, many homeowners will find a marked difference between what they have been paying and what they will be required to pay on a revised mortgage deal.
First-time buyers
If you are buying your first home and have secured a mortgage deal with a formal offer from your lender, it is unlikely that the most recent interest rate hikes will affect you. However, rates that have not been secured could be subject to revision so you should check with your lender to confirm the rate of interest that will be charged on your mortgage loan. It is worth noting that a higher interest rate could reduce the amount of money that you can borrow based on the affordability criteria that your lender uses.
Home movers
If you have completed a mortgage application and received a formal offer from your mortgage lender, you shouldn't see any change to the interest rate that has been agreed. You should always check with your lender to ensure this is the case.
For each 0.5 percentage points that your interest rate is increased, your monthly mortgage payment could increase by £26 (Based on a mortgage balance of £100,000 over 25 years)
What you can do if you are affected by increasing mortgage rates
Although today's news of 2-year fixed-rate deals breaching 6% may cause concern amongst borrowers, there are deals to be found that will charge lower rates of interest.
Importantly, your loan-to-value (LTV) ratio is a large determining factor when it comes to the mortgage deal that you can secure with lower rates of interest available to borrowers with lower LTVs. Exploring ways to increase your deposit is one way to reduce the cost of borrowing, however, not everyone is afforded that luxury. You will also find more competitive mortgage rates by searching all lenders' mortgage deals, particularly as some mortgage deals are only available through a mortgage intermediary.
Speak to a qualified mortgage broker to get access to the widest range of mortgage deals - if you do not have a mortgage broker, you can source one in your local area using VouchedFor* or Unbiased*. Both of these directory services will provide you with qualified financial professionals in your area who have been vetted by customers who have used their services.
Help if you can't afford your mortgage payments
If you are struggling to afford your mortgage payments or are worried that your mortgage rate will increase making it unaffordable for you, you should contact your lender in the first instance. Lenders have been guided by the government to act sympathetically and wherever possible, support borrowers who are struggling with mortgage costs, particularly where they may be vulnerable.
You can also access support and guidance from the following organisations:
