What next for mortgage rates? A wave of major lenders including Halifax pull deals from sale as market is rocked by rumours of emergency hike

Business Sep 27, 2022 at 10:03

A wave of major lenders have pulled mortgage deals from sale as the financial markets are rocked by the volatile pound and expectations that the Bank of England may have to step in.

Today, Halifax, the UK’s largest mortgage lender, made the unusual move of temporarily withdrawing all of its mortgage products that come with fees

Meanwhile, Virgin Money and Skipton Building Society temporarily pulled all new mortgage business with immediate effect.

Mortgage brokers have reported receiving an influx of emails from lenders across the market informing them that they would not be taking on new business at the moment.

After the pound tumbled overnight before regaining some ground today, UK borrowing costs jumped and speculation mounted of an emergency rate hike to stem sterling’s losses, the Bank of England stepped in with an announcement that it hoped would calm the waters.

Bank of England boss Andrew Bailey said: ‘The MPC will not hesitate to chnage rates by as much as needed to return inflation to the 2 per cent target sustainably in the medium-term.’

Brokers commented that the mortgage market was in a state of disarray and there were risks of a rerun of the credit crunch, when borrowers saw rates rocket and struggled to secure home loans.

The cost of a mortgage has increased significantly following successive rises in the Bank of England’s base rate, with average interest rates on five-year fixed mortgages hitting a seven-year high.

Before this week’s events are factored in to mortgage pricing, someone with taking the average two-year fixed rate on a £250,000 home loan on a 25-year term was already looking at £250 a month more – or £3,000 extra per year – to remortgage compared to December.

Lewis Shaw, founder and mortgage expert at mortgage broker Shaw Financial Services said: ‘It’s all off the back of the mini-budget, and the market reaction, not to mention swap rates which have shot up off the back of it.

‘Now everyone is expecting the BoE to jump in with a rate hike to try and calm it down, and none of the lenders wants to get caught with their pants down as they did during Covid.

‘The BoE pretty much ruled out a hike which has caused even more uncertainty as they’ve surely got to step and do something.

‘The problem is last time this happened, they shot the base rate up to 15 per cent. A 0.5 per cent rise would be useless. It needs to be a significant jump to sure things up. With lenders pulling entire ranges, it feels like 08 again, except this time there’s already a hole in the roof.’

What’s happening to interest rates?

The Bank increased the base rate from 0.1 per cent in December to 2.25 per cent in September, in a bid to curb rising inflation.

It is the first time since December 2008 that the rate has gone beyond 2 per cent. Most experts predict it will continue rising and could reach anywhere between 3 and 6 per cent in the next 12 months.

Assuming rate rises are broadly reflected in fixed mortgages, a rise to 3 per cent could mean an average of 4.75 per cent for both two and five year fixes.

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.

According to the latest data from financial information service Moneyfacts, the average two-year and five-year fixed rate both increased for the eleventh consecutive month in September, reaching 4.24 per cent and 4.33 per cent respectively.

In August the average rate on a two-year fixed has exceeded 4 per cent for the first time in almost a decade.

Since the base rate began rising in December 2021, the two-year rate has increased by 1.9 per cent and the five-year rate by 1.69 per cent.

A fixed five-year mortgage has also risen from 2.49 per cent to 4.33 per cent in just one year

It means that when people on fixed deals come to remortgage, they may end up paying more each month.

Someone who took out the cheapest five-year mortgage on the market in 2017 could have secured a rate of 2.77 per cent, according to Moneyfacts.

As of today, the cheapest five-year fixed rate deal costs 3.64 per cent.

It means that someone repaying a £200,000 mortgage over a 25 year term could expect to pay £1,016 a month instead of £914.

Gap between two and five year fixes narrowing

There is now only only 0.9 per cent separating the average two and five-year fixed rates – the smallest this differential has been since February 2013, according to Moneyfacts.

Some lenders are pricing them at the same rate, or even making five-year deals cheaper.

This may be because more borrowers are opting for longer fixes to shield their monthly mortgage payments against inflation, meaning lenders are pricing five-year deals more competitively.

It could also be because banks are anticipating inflation and interest rates to fall in two to three years’ time, so they could benefit from borrowers still being locked in to fixes at higher rates.

The recent rate rises follow months of record lows in summer 2021, when fixed-rate mortgages for those with lots of equity or big deposits went sub-1 per cent in some cases.

With rates on the rise, it is important for home buyers and those remortgaging to shop around for the best deal.

But they should think twice before picking the lowest-interest deal, as the fees can sometimes make the mortgage more expensive than a higher-rate product over the life of the fix.

What are the best mortgage deals?

Although rates are on the rise, it could still pay to switch, especially if you are on your lenders’ standard variable rate.

These borrowers could save hundreds of pounds a month by taking a fixed deal.

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.

Mark Gordon, director of money at Compare the Market, said: ‘Languishing on a lender’s standard variable rate mortgage is likely to cost you thousands of pounds more than you need to pay.’

The attraction of a two-year fix may be lower rates (in some cases) and flexibility, but that comes at the expense of needing to remortgage in two years to avoid slipping onto a more expensive standard variable rate.

A five-year fix gives the opportunity to lock into your rate for a longer period and avoid extra fees and the risk of higher rates in a relatively short time.

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.

Borrowers should have a quick look at the rates below. These are regularly updated by This is Money’s mortgage team. If you spot a deal you think has been pulled or should be in there, email us via [email protected] with mortgage rates in the subject field.

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.

Best fixed-rate mortgage deals

Five-year fixed rate mortgages

HSBC has a five-year fixed-rate mortgage at 3.53 per cent with a £999 fee at 60 per cent loan-to-value

Halifax has a five-year fixed-rate mortgage at 3.54 per cent with a £1,048 fee at 60 per cent loan-to-value

Two-year fixed rate mortgages

The Post Office has a two-year fixed-rate mortgage at 3.44 per cent with £2,104 fee at 60 per cent loan-to-value

Skipton Building Society has a two-year fixed-rate mortgage at 3.62 per cent with £995 fee at 60 per cent loan to value

Mid-range deposit mortgages

Five-year fixed rate mortgages

The Post Office has a five-year fixed-rate mortgage at 3.59 per cent with a £2,104 fee at 75 per cent loan-to-value

Clydesdale has a five-year fixed-rate mortgage at 3.6 per cent with £999 at 75 per cent loan-to-value

Two-year fixed rate mortgages

The Post Office has a two-year fixed rate mortgage at 3.44 per cent with a a £2,104 fee at 75 per cent loan-to-value

Skipton Building Society has a two-year fixed-rate mortgage at 3.62 per cent with a £995 fee at 75 per cent loan-to-value

Low-deposit mortgages

Five-year fixed rate mortgages

Clydesdale has a five-year fixed-rate mortgage at 3.88 per cent with a £999 fee at 90 per cent loan-to-value

HSBC has a five-year fixed-rate mortgage at 3.96 per cent with a £999 fee at 90 per cent loan-to-value

Two-year fixed rate mortgages

Clydesdale has a two-year fixed rate mortgage at 3.79 per cent with a £999 fee at 90 per cent loan-to-value

Skipton Building Society has a two-year fixed-rate mortgage at 3.91 per cent with a £995 fee at 90 per cent loan-to-value

Best tracker and discount rate mortgages

Tracking the base rate may seem an odd decision when rates are likely to only go up. However, there is one big advantage to a good lifetime tracker: 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.

Lifetime trackers

First Direct has a lifetime variable rate at base plus 1.94 per cent for the term, currently at 3.69 per cent with a £490 fee at 60 per cent loan-to-value

Swansea Building Society has a lifetime tracker at a standard variable rate for the term, currently at 4.85 per cent, with £1,800 fee at 75 per cent loan-to-value

Shorter trackers

Beverley Building Society has a two-year tracker at 2.8 percent discount, currently at 2.44 per cent, with a £50 fee at 75 per cent loan-to-value

Vernon Building Society has a five-year tracker at 3.31 per cent discount, currently at 2.54 per cent, with a £99 fee at 60 per cent loan-to-value

Watch out for discount rates, as these track a rate set by the lender rather than following the path of the Bank of England base rate.

Most lenders move their internal variable rate in line with the base rate, but they don’t have to, meaning you could see your rate rise even if the base rate stays put.

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.

Choosing a mortgage – the essential 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.

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.