The cost of a two-year fixed-rate mortgage in the UK rose above 6 per cent on Monday while two-year gilt yields broke through the 5 per cent mark for the first time in 15 years, piling pressure on homeowners and Rishi Sunak’s government.
Mortgage costs have been rising sharply over the past week, ahead of an expected increase in interest rates from the Bank of England on Thursday.
According to data provider Moneyfacts, the average cost of a two-year fixed-rate deal rose from 5.98 per cent on Friday to 6.01 per cent on Monday morning. The cost of a five-year deal has risen from 5.62 per cent to 5.67 per cent.
In an indication that mortgages rates could have even further to rise, two-year gilt yields rose 0.07 percentage points on Monday, as they went above 5 per cent for the first time since 2008.
Such increases pose a mounting challenge to Sunak’s government, which is already confronting a cost of living crisis and is lagging behind in the polls. But on Monday the prime minister declined to offer any new support to people struggling with mortgage payments.
“I know the anxiety people will have about the mortgage rates, that is why the first priority I set out at the beginning of the year was to halve inflation because that is the best and most important way that we can keep costs and interest rates down for people,” he told ITV’s Good Morning Britain.
Jeremy Hunt, chancellor, has also ruled out direct fiscal support for mortgage holders, warning it would push up borrowing, forcing inflation and interest rates higher.
To date, Sunak’s pledge to halve inflation from double-digit rates at the end of last year has been confounded by continued price rises, with inflation at 8.7 per cent for April. The BoE has acknowledged its economic model has failed to predict inflation’s persistence.
Economists polled by Reuters expect UK core inflation — which strips out volatile food and energy prices — to stay elevated at an annual rate of 6.8 per cent in May.
In recent weeks, swaps markets have revised estimates markedly upwards for the rate at which they expect BoE benchmark interest rates to peak, to 5.80 per cent for early next year. That is about one percentage point higher than had been expected when the BoE last met on May 11.
Swap rates feed into lenders’ decisions on mortgages, since they guide their pricing of fixed-rate deals.
Monday marks the first time since the market turmoil of Liz Truss’s September “mini” Budget that the average cost of a two-year mortgage fix has breached 6 per cent.
Mortgage rates fell back from such highs in November but have risen sharply in recent weeks because of concerns about persistent inflation and wage growth.
Simon Gammon, founder and managing partner at mortgage broker Knight Frank Finance, said the trend was “hugely unfortunate”.
He added: “Rates at this level are going to come as a shock to the 1.4mn or so households that face remortgaging this year.”
The number of residential mortgage deals available is also falling. There were 4,683 products available on Monday, down from 4,923 on Friday.
Those building societies, banks and specialist lenders withdrawing mortgage deals at the weekend or raising rates included the Co-operative Bank, Kensington Mortgages, and building societies Nottingham, Progressive, Principality and Leeds.
Santander, NatWest, Nationwide and HSBC took similar moves last week.
Rates on buy-to-let mortgages rose even faster than those on residential deals, with the average two-year fixed rate jumping from 6.21 per cent on Friday to 6.3 per cent on Monday, Moneyfacts said.
Landlords with mortgages are more sensitive to rate rises since they generally favour interest-only loans. This means their monthly payments rise more sharply when interest rates increase.
Despite the rise in interest rate expectations, sterling fell 0.1 per cent against the dollar to $1.2803.
Source: Economy - ft.com
