Why Mortgage Costs Are Rising Despite Interest Rate Cuts
Mortgage costs are climbing, with the average rate on a two-year fixed deal now at 5.5%—even after a recent interest rate cut by the Bank of England. Major lenders like Barclays, HSBC, NatWest, and Nationwide have raised rates on new fixed mortgage deals, leaving many borrowers puzzled and concerned.
This is unwelcome news for those hoping to see a sustained drop in mortgage costs, especially as the Bank of England recently cut its base rate from 5% to 4.75%. So, why are mortgages getting more expensive? Let’s unpack the situation.
How Do Mortgage Rates Impact Borrowers?
Mortgage rates are crucial for homeowners and buyers alike. Here’s why:
- Fixed-Rate Mortgages: Over 80% of mortgage holders in the UK are on fixed-rate deals. These rates stay the same for the duration of the term, typically two or five years.
- Renewal Shock: About 800,000 fixed-rate mortgages with interest rates of 3% or lower are set to expire annually until 2027. Borrowers will need to secure new deals at much higher rates, significantly increasing their monthly payments.
- First-Time Buyers: Rising rates pose a challenge for those looking to step onto the property ladder, as affordability becomes a key hurdle.
Current Mortgage Trends
Despite falling base rates, the average two-year fixed mortgage now carries an interest rate of 5.5%, and five-year fixed deals average 5.22%. Even the most competitive deals, often reserved for those with large deposits, are now priced above 4%.
These increases come after the Budget announcement, which has influenced broader borrowing costs.
Why Are Mortgage Rates Rising?
The base rate cut on 7 November was widely expected, so lenders had already factored it into their pricing. However, what changed the game was the Bank of England’s updated outlook:
- Slower Future Cuts: The Bank signaled that further rate cuts would be more gradual than previously anticipated.
- Inflation Concerns: The Chancellor’s Budget included significant spending pledges, which could increase inflation. This, in turn, pressures lenders to keep rates higher for longer.
Andrew Bailey, Governor of the Bank of England, explained:
“Rates will continue to fall gradually, but they cannot be reduced too quickly or by too much.”
David Hollingworth, a mortgage expert at L&C, echoed this sentiment:
“The outlook for interest rates has shifted, leading lenders to price mortgages with a ‘higher for longer’ expectation.”
The Impact of Market Uncertainty
Mortgage lenders price their deals not just based on current interest rates but on where they expect rates to go. The recent Budget and the Bank’s cautious stance have created uncertainty, leading lenders to raise their rates.
This uncertainty also means mortgage deals are short-lived, with competitive offers disappearing quickly. Aaron Strutt, from broker Trinity Financial, warns:
“Best-buy deals aren’t lasting long, so borrowers need to act fast. If your mortgage is due for renewal, keep an eye on rates as lenders won’t always alert you to increases.”
What Can Borrowers Do to Manage Costs?
While the outlook may seem challenging, there are ways to navigate rising mortgage rates:
- Make Overpayments: If you’re on a low fixed-rate deal, consider overpaying to reduce your overall debt and save on future interest.
- Switch to Interest-Only Payments: This can lower your monthly payments, though it won’t reduce your original loan amount.
- Extend Your Mortgage Term: Stretching your mortgage term to 30 or even 40 years can make payments more affordable, though you’ll pay more in interest over the long term.
What’s Next?
Although the long-term trend for interest rates is downward, timing is critical for borrowers. The market’s current volatility means mortgage rates could continue fluctuating, adding pressure on those renewing or entering the market.
In this unpredictable environment, staying informed and seeking advice from mortgage brokers can help you secure the best possible deal.
