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Mortgage rate Q&A: What’s happening?

Christina Hoghton
Written By:
Christina Hoghton

Everything you need to know about the current mortgage market and how to navigate the chaos

Mortgage rate rises have made front page news, but it’s important not to panic.

Many borrowers will face higher monthly mortgage repayments, but how much higher and when you’ll face an increase depends entirely on your own circumstances.

Here’s what’s happening?

What’s happened to mortgage rates?

Mortgage rates have risen over the last year, and significantly in the last two years.

Then it was typical for borrowers to get a rate under 2% or thereabouts, depending on your circumstances.

Now you are looking at around 5% or higher. Again this varies hugely depending on your needs and finances.

According to Moneyfacts, the average five-year fixed rate now stands at 5.56%, up from the 5.17% at the beginning of June. It said this translates to roughly £46 more a month (on a £200,000 25-year mortgage).

Rates were already steadily ticking up during 2022 in line with the Bank of England increasing its Base Rate from a low of 0.1% at the start of December 2021 to 4.5% today.

They rocketed last October following the disasatrous Truss and Kwarteng mini-budget, which rocked financial markets.

However, the mortgage market settled in the first few months of 2023 and mortgages, while higher than a year earlier, were lower than feared last Autumn.

Things were looking calmer until about three weeks ago.

On the up again

The Monetary Policy Committee hiked its Base Rate again in May, to 4.5%, and the Consumer Prices Index for the year to April was published at the end of May. CPI had fallen to 8.7%, which was not as much of a drop as many had hoped for.

Markets began to react to the likelihood of further Base Rate rises and prolonged inflation, and we have seen ‘gilt yields’ rising.

These sound very technical, and they are – gilt yields actually represent the return on government bonds. But they affect swap rates, which directly impact fixed rate mortgage pricing and make up one element of the cost of funding for lenders.

Gilts (and swap rates) have been moving up so quickly in recent weeks that lenders have started to pull their products from the shelves, to reprice them upwards to account for their own higher costs.

Those product withdrawals have led to panic, as borrowers and mortgage brokers have struggled to secure deals that were available just hours previously.

Plus, as rates continue to move upwards, borrower affordability is further squeezed, making it harder to get the numbers to stack up.

Will they rise further?

All bets are on a further increase in the Base Rate next week, which would take it to 4.75% or even higher, from its current level of 4.5%.

Economists and financial markets are now starting to price in even more rises after that, with a consensus forming around Base Rate potentially peaking at 5.75%.

This would have a massive impact on mortgage rates, on top of the rises we’ve already seen.

But of course, it’s not guaranteed. No one can predict interest rates movements, and especially not this year.

What does it mean for variable rate borrowers?

Those on variable rates, including tracker rates, standard variable rates and discounted variable rates, have already seen their pay rate rise significantly this year.

Some borrowers may be holding tight and waiting for rates to fall back instead of locking into an expensive fixed rate.

Unfortunately though, it looks as though further increases could be on the cards.

What if I’m on a fixed rate mortgage?

If you are on a fixed rate deal, nothing will happen to your pay rate while you are within your deal period – which might be two years or five years for example.

The problem is that when you come to the end of your current deal period you will have a choice – do nothing and automatically default to your lender’s standard variable rate, which will likely be much higher than you’ve been used to paying. Or move to a new fixed rate which will also be much higher than your current mortgage rate.

And all of these rates could rise further in the coming months.

How can I find the best new mortgage deal?

Speak to a mortgage broker for independent and expert advice.

Brokers will know what deals are available to you and will be able to apply on your behalf. They will look across the market, including checking what is on offer from your current lender to give you an overall picture and find the right product for your needs.

Remember that average rates are just averages. You might be able to get a more competitive mortgage if you have significant equity in your home and strong affordability – and a broker will help you to find one.

Realistically those remortgaging this year – and there are still hundreds of thousands with mortgage deals ending in 2023 – will be facing a much higher mortgage rate and therefore higher monthly repayments.

Depending on the size of your mortgage and the scale of the change in rate, this could be a difference of hundreds of pounds a month.

What if I can’t pay my mortgage?

Speak to your lender.

Do this even before missing a payment if you’re worried you will struggle to pay your mortgage in the coming months, for example.

There are various options they can come up with to help, such as temporarily moving you to an interest-only mortgage to reduce your monthly repayments or extending your mortgage term for the same reason.

But they will be ready to offer support and help and are expecting to receive these calls from worried borrowers, so don’t ignore any concerns you have about meeting your repayments.

If you fall into arrears your lender will work with you to find solutions. Although ultimately they are able to repossess the property, in practice they will do everything they can to avoid this happening. It’s better for you and the lender to help you get back on track.

There is also very limited government support available with Support for Mortgage Interest, but this has strict eligliblity criteria that means it isn’t available to many borrowers.

The most important thing is to be proactive. Look at your mortgage, see when you need to renew and start to look at your options at least six months before you need to switch.

Take advice from a broker to help you find a new deal and speak to your existing lender if you don’t think you can pay your mortgage.