The cost of two-year fixed rate mortgages in the UK has surpassed the highs reached in the wake of last autumn’s “mini” Budget, as lenders push up prices in response to interest rate increases.
Lenders have responded to rising interest rates and expectations of further tightening by ratcheting up the cost of borrowing, with the average rate on a two-year fixed mortgage hitting 6.66 per cent on Tuesday, according to data provider Moneyfacts. That is the highest level since 2008.
Two-year fixed rate mortgages previously peaked at 6.65 per cent on October 20 last year, after the unfunded tax cuts in then prime minister Liz Truss’s “mini” Budget triggered intense market volatility.
The latest peak will pile greater pressure on thousands of homeowners and prospective buyers already squeezed by the higher cost of living.
Rachel Springall, finance expert at Moneyfacts, said that although consumers could still find some competitive deals, “borrowers concerned over affordability of a deal might pause their home ownership plans, or indeed park the idea of refinancing”.
The rise in borrowing costs comes on the same day that MPs on the House of Commons Treasury select committee are due to question mortgage lenders on consumer behaviour following recent rate rises, mortgage affordability and availability, and the impact on house prices.
High mortgage rates contributed to UK house prices falling last month at the fastest annual pace since 2011, according to Halifax data. The average property price declined 2.6 per cent in June compared with the same month in 2022, and was more than double the drop of 1.1 per cent in May.
Although repossessions remain at historically low levels, the government last month struck an agreement with British banks to wait at least 12 months before repossessing the homes of borrowers who fall behind on payments as the cost of repayments squeezes household budgets.
The deal also included a commitment to allow borrowers temporarily to lengthen mortgage terms without affecting their credit ratings.
The Bank of England lifted interest rates to a 15-year high of 5 per cent last month, and investors predict that they will reach 6.5 per cent by next March, the highest level since 1998.
Stubbornly high inflation, which stands at 8.7 per cent, is stoking bets that the BoE will raise rates further, with two-thirds of economists polled by Reuters forecasting a half-point rise at the central bank’s next meeting in August.
BoE governor Andrew Bailey and UK chancellor Jeremy Hunt on Monday reiterated their call for wage restraint, arguing that pay increases, which hit a record high in the three months to May, were making it harder to tame inflation.
In their Mansion House speeches, Hunt said that he and Bailey would do “what is necessary for as long as necessary to tackle inflation” and return it to the central bank’s 2 per cent target.
“That means taking responsible decisions on public finances, including public sector pay, because more borrowing is itself inflationary,” Hunt said.
Source: Economy - ft.com
