Mortgage rates are rising rapidly, after coming down from their post mini-Budget highs.
In early May mortgage rates had fallen to below 4 per cent for some borrowers, but a succession of base rate rises and disappointing inflation figures have seen lenders withdraw mortgages from the market and push up prices.
On 7 July, five-year fixed rate deals were at an average of 6.04 per cent, according to Moneyfacts. The average two-year fixed rate was 6.54 per cent.
That was an up from 5.17 per cent and 5.49 per cent on 1 June. Two years ago, the two-year average rate was 2.54 per cent.
> Quick link: Check the best mortgage rates you could apply for
Rate rises: Mortgage rates had dropped after their spike last year, but are now rising again.
Cheaper deals are available, especially for those with larger deposits wanting a five-year fix – but none are cheaper than around 5.15 per cent.
The lowest fixed rate mortgages deals on the market are 10-year deals
Before then-Chancellor Kwasi Kwarteng’s mini-Budget on 23 September the average two-year fixed rate was 4.74 per cent and the five-year fix was 4.75 per cent.
This is Money’s best mortgage rates calculator can show you the deals you could apply for and what they would cost.
You can also work out how a different interest rate would change your monthly payments, taking into account any fees, using our true cost mortgage calculator.
What next for mortgage rates?
With costs set to be much higher for many of those coming up to a remortgage, homeowners are keen to find out when rates may begin to drop more substantially.
They can find a clue to this in swap rates. These are agreements in which two counter parties, for example banks, agree to exchange a stream of future fixed interest payments for a stream of future variable payments, based on a set amount.
Mortgage lenders enter into these agreements to shield themselves against the interest rate risk involved with lending fixed rate mortgages.
Put more simply, swap rates show what financial institutions think the future holds concerning interest rates.
Currently five-year year swap rates are hovering around 5.25 per cent, suggesting that this is where they believe interest rates will roughly be over the next five years.
The two-year rate is around 6 per cent.
Why did mortgage rates rise?
Mortgage rates first began to increase in December 2021, when the Bank of England began putting up its base rate to try and combat rising inflation.
However, this accelerated after the mini-Budget in late September. The pound tumbled after the then-Chancellor, Kwasi Kwarteng, announced a wave of unfunded tax cuts that unsettled bond markets.
After former Prime Minister Liz Truss resigned in October and new Chancellor Jeremy Hunt reversed nearly all of the mini-Budget announcements, the markets calmed down and the cost of borrowing has fallen with mortgage rates slowly dropping too.
The Bank of England’s base rate has continued to rise and is now at 5 per cent. Ahead of the latest hike in May, some had thought the increases would soon stop.
But following a fresh round of stubbornly high inflation figures, markets are now betting the base rate will go above 6 per cent by the end of the year.
This led to mortgage lenders beginning to edge up their rates again.
What will happen to house prices?
Average house prices fell by 2.6 per cent in the year to the end of June, according to Halifax, the largest annual fall for 12 years.
It marks a shift from the double-digit growth seen at some points in the past few years, and higher mortgage costs have been a factor.
Predictions vary, but several analysts have suggested that house prices could fall between 10 and 15 per cent over the next two years. One property expert even believes that average prices will fall 35 per cent.
Karen Noye, a mortgage expert at Quilter says: ‘House prices have seen yet another modest drop of 0.1 per cent in June, according to Halifax.
‘Given the huge squeeze on affordability at the moment this is likely to be sign of things to come but its worth remembering that the housing market despite everything that has been thrown at it over the past few years has remained resilient.
‘However, the economic storm currently battering Britain seems like an insurmountable hurdle and downward pressure on house prices is inevitable.
‘With two year fixed rate mortgages now well above 6 per cent, people’s ability to continue to service their mortgage will be called into question and also first time buyer’s desire to jump into paying such a high monthly rate will also be tested.
‘This could create an environment where those who have overstretched themselves look to offload their properties at a time where there is a dearth of demand.’
What next for the base rate?
The Bank of England has steadily increased the base rate over the past year from 0.1 per cent in December 2021 to 5.00 per cent on 22 June 2023, in a bid to curb rising inflation.
The most recent Monetary Policy Committee decision saw the rate rise by 0.50 per cent, and it was hoped this was the last rise in the current cycle.
However, a higher than expected inflation figure this month at 8.7 per cent has led the market to price in more rate rises.
Though they are not directly linked to the base rate, interest rates on new fixed mortgages usually increase when the base rate goes up, because banks must pay more to borrow money.
Those on tracker rates linked to the base rate will see their rate rise instantly.
You can check best buy tables and the best mortgage rates for your circumstances with our mortgage finder powered by London & Country – and figure out what you’ll actually be paying by using our new and improved mortgage calculator.
What are the best mortgage deals?
Though mortgage rates are higher than many people are used to it may still pay to switch, especially if you are on your lenders’ standard variable rate.
And for those coming to the end of a fixed term, switching to another fixed term with a different lender could be cheaper than sticking with their existing one.
Choosing what length of fix to go for depends on what you think will happen to interest rates in that time, and what your personal circumstances are – for example if you will need to move.
Whatever the right type of mortgage for your circumstances, shopping around and speaking to a good mortgage broker is a wise move.
For a full rate check use This is Money’s mortgage finder service and best buy tables. These are supplied by our independent broker partner London & Country.
Borrowers on their lenders’ standard variable rate could save a significant amount by switching to a fixed deal – even as rates rise
Best fixed-rate mortgage deals
We have taken a look at the best deals on the market based on a 25-year mortgage for a £285,000 property – the current UK average house price according to the ONS.
Bigger deposit mortgages
Five-year fixed rate mortgages
First Direct has a five-year fixed rate at 5.16 per cent with a £490 fee at 60 per cent loan to value. It also has a 5.28 per cent deal with no fees which may work out slighly cheaper overall.
First Trust Bank (AIB) has a five-year fixed rate at 5.17 per cent with a £200 fee at 60 per cent loan to value.
Two-year fixed rate mortgages
First Direct has a two-year fixed rate at 5.64 per cent with a £490 fee at 60 per cent loan to value. It also has a 5.84 per cent rate without fees that may work out slightly cheaper overall.
Barclays has a two-year fixed rate at 5.73 per cent with a £899 fee at 60 per cent loan to value. It also has a 5.92 per cent without fees that may work out slightly cheaper overall.
Mid-range deposit mortgages
Five-year fixed rate mortgages
First Trust Bank (AIB) has a five-year fixed rate at 5.17 per cent with a £200 fee at 75 per cent loan to value.
First Direct has a five-year fixed rate at 5.23 per cent with a £490 fee at 75 per cent loan to value.
Two-year fixed rate mortgages
Lloyds Bank has a 5.64 per cent fixed rate deal with a £999 fee at 75 per cent loan-to-value. There is also an option that comes with a higher rate, but without the fee, which could work out cheaper overall.
First Direct has a two-year fixed rate at 5.69 per cent with a 490 fee at 75 per cent loan to value. There is also an option that comes with a higher rate, but without the fee, which could work out cheaper overall.
Low-deposit mortgages
Five-year fixed rate mortgages
HSBC has a five-year fixed rate at 5.07 per cent with a £999 fee at 90 per cent loan to value. For first time buyers only.
First Direct has a five-year fixed rate at 5.20 per cent with a £490 fee at 90 per cent loan to value.
Two-year fixed rate mortgages
First Direct has a two-year fixed rate at 5.88 per cent with a £490 fee at 90 per cent loan to value.
HSBC has a two-year fixed rate at 5.84 per cent with a £999 fee at 90 per cent loan to value for those purchasing. There is also an option that comes with a higher rate, but without the fee, which could work out cheaper overall. HSBC’s remortgage rates are slighly higher.
>> Check our our mortgage tracker to compare the latest available deals
Tracker and discount rate mortgages
The big advantage to a good lifetime tracker is flexibility.
The same usually goes for discount rate mortgages, which track a certain level below the lenders’ standard variable rate.
A fixed-rate mortgage will almost inevitably carry early repayment charges, meaning you will be limited as to how much you can overpay, or face potentially thousands of pounds in fees if you opt to leave before the initial deal period is up.
You should be able to take a good fixed mortgage with you if you move, as most are portable, but there is no guarantee your new property will be eligible or you may even have a gap between ownership.
A good lifetime tracker has no early repayment charges, you can up sticks whenever you want and that suits some people.
Make sure you stress test yourself against a sharper rise in base rate than is forecast.
Can you get a mortgage?
Getting a mortgage is tougher than it once was. You will need to get your finances in order and be prepared for the lengthier application process and in-depth affordability interviews getting a mortgage requires nowadays.
Lenders also apply different standards to what they will lend.
Weigh up the above, check the rates here and in our best buy mortgage tables, have a scout around what the best deals look like – and speak to a good independent broker.
There are a couple of things to look out for if you do decide to fix.
You need to check the bumper arrangement fees are worth paying – if you don’t have a big mortgage you may be better off with a slightly higher rate and lower fee.
It’s also wise to think carefully about whether you expect to move home soon. A good five-year fix should be portable, so you can take it with you.
But your new property will need to be assessed and you might need to borrow extra money, and so your lender could still say no. Getting out of a fixed rate typically requires a hefty hit to the pocket from early repayment charges.
Compare true mortgage costs
Work out mortgage costs and check what the real best deal taking into account rates and fees. You can either use one part to work out a single mortgage costs, or both to compare loans
Mortgages – a quick guide
1. How big a deposit do I need?
To get the full choice of deals raising a decent deposit is still vital. The benchmark figure is 25 per cent, if you have this then you’ll be getting close to the best rates, although for an absolute cheapest deal you’re still likely to need 40 per cent.
However, a selection of better deals for smaller deposits is available up to 90 per cent.
2. Should I take a fixed rate?
Most borrowers consider the security of a fixed rate as worthwhile, whereas variable rate deals can be cheaper but leave you exposed to potential rate rises.
If you decide to take a fix you need to carefully consider how long for.
Two-year deals are cheap but only offer very short-term security and incur extra costs when you remortgage.
Five-year deals lock you in for longer and come with slightly higher rates but better security and no need to remortgage in a relatively short space of time.
3. Should I take a tracker rate?
Tracker rates are essentially a gamble. What looks like a bargain rate now, could soon get very expensive when interest rates rise.
Anyone considering a tracker needs to make sure they are not just storing up a problem for the future. If the tracker comes with an early redemption penalty that would make it expensive to jump ship, then make sure your finances could take a rise of at least 2 per cent to 3 per cent in interest rates.
For that reason we at This is Money like tracker deals that fit into one of these three categories: no early redemption penalties, a cap to how high the rate will go, or that let you jump ship for a fixed rate if rates rise.
4. Should I get off a standard variable rate?
Standard variable rates are what borrowers slip onto by default when they finish a fixed or tracker deal period.
They can typically be changed by lenders at any time – without the Bank of England moving rates. They may also rise or fall by more than any move in base rate.
A number of mortgage borrowers have fallen victim to lenders hiking their standard variable rates, despite the base rate remaining stable.
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