Mortgage borrowers’ chances of securing an ultra-cheap deal narrowed this week in spite of a decision by the Bank of England to hold interest rates at 0.1 per cent, as banks and building societies raised interest rates across their fixed-rate home loans.
The central bank’s decision surprised financial markets, which had factored in a rise this month. Rates are nonetheless likely to rise to around 1 per cent by the end of 2022, according to the Bank’s inflation report.
Lenders, which had already been raising interest rates on their home loans amid expectations the Bank would act, pressed ahead with further withdrawals of low rates.
Rate rises on mortgages at HSBC, NatWest and Nationwide took effect on Thursday. Skipton Building Society said it would remove all of its three-year fixed rates on Friday and Leeds Building Society announced a rise in rates on mortgages at loan-to-value ratios of 80 and 85 per cent.
David Hollingworth, associate director at broker L&C Mortgages, said: “Fixed rates have already reacted to the market expectation of a rate rise, so have been on the rise with the record low sub-1 per cent rates disappearing fast.”
For a borrower paying an average standard variable rate on a £150,000 repayment mortgage over 20 years, a rise in rates to 1 per cent would leave them paying an extra £71 a month, according to the broker’s calculations.
The number of sub-1 per cent deals fell from 131 in the first week of October to 30 by Wednesday, according to Moneyfacts, the finance website.
One lender to withdraw such a rate this week was HSBC, which raised the 0.99 per cent interest rate on its two-year fixed-rate mortgage to 1.14 per cent. Nationwide raised the five-year rate on its 60 per cent LTV deal from 1.24 per cent to 1.34 per cent.
Rate rises are set to have less impact on mortgaged households than in the 1990s and 2000s because of long-term growth in fixed-rate mortgages, which protect borrowers from rate rises over the period of the agreed term. Over 90 per cent of mortgages advanced over the past four years have been fixed rate loans.
Borrowers are further insulated by their increasing preference for five-year fixed-rate deals, now accounting for 46 per cent of mortgage advances against 45 per cent for two-year fixes, according to UK Finance data.
Ray Boulger, senior mortgage technical adviser at broker John Charcol, said: “The vast majority of people are not going to be affected, at least initially, by a Bank rate change.”
The impact of a rate rise to 1 per cent in 2022 is also unlikely to reverse the recent growth trend in the housing market, according to Andrew Wishart, housing economist at Capital Economics. “Mortgage repayments are currently equivalent to 39 per cent of the median full-time salary after tax, below the historical average of 43 per cent. And a rise in interest rates to 1 per cent would only take mortgage repayments up to the long run average,” he said.
Average house prices reached a new high of £270,000 in October, Halifax said on Friday, with an annual rate of inflation of 8.1 per cent.
The prospect of rate rises nonetheless means those who have stretched their finances to take out a mortgage should consider their options to lock in a cheaper deal before rates rise further, said Simon Gammon, managing partner at broker Knight Frank Finance.
“Those with a fixed-rate deal coming to an end in six to nine months can lock in potentially with a new or existing lender three to six months out from when they need the deal. You can almost book the money for next year this side of Christmas.”
Some borrowers have been willing to pay charges to end their existing deals early in order to secure a longer term fix for peace of mind. Aaron Strutt, product director at broker Trinity Financial, said one client recently decided to pay £12,000 in exit fees on two five-year mortgages in order to lock in a low rate over 10 years.
Source: Economy - ft.com
