Mortgage rates rise: what does it mean for repayments?
For the first-time since last summer, mortgage rates are on the rise – but what effect will higher costs have on homebuyers?
It’s a confusing time to apply for a mortgage, with lenders chopping and changing their rates, and deals lasting an average of just 15 days.
But don’t worry, we’re here to help you get your head around it all. Read on to learn about how higher rates could impact your repayments.
Inflation casts a shadow over the mortgage market
This month, average rates on two-year and five-year fixed-rate mortgages have risen by 0.2 and 0.16 of a percentage point respectively.
The price hikes come amid uncertainty over what will happen next with inflation and, consequently, when the Bank of England’s base rate will fall.
This week, a handful of major lenders including Halifax, Nationwide and Santander have increased their rates. However, Coventry Building Society has bucked the trend by cutting its prices.
Data from Moneyfacts shows repricing is rife. Deals are disappearing after an average of just 15 days, and some headline-grabbing offers are barely lasting a week.
The graph shows how average rates on two-year and five-year fixed-rate mortgages have changed since March 2023. To find out the latest table-topping deals, see our guide to the best mortgage rates in March.
How do rate rises affect monthly repayments?
It’s one thing saying rates have risen by 0.2 of a percentage point, but what you’ll really want to know is how much you’ll pay.
Small price rises, like those recorded over the last month, are unlikely to make a huge difference to monthly repayments.
Using data from Moneyfacts, we’ve modelled the effect that price rises have on repayments.
We found that, for someone borrowing £150,000, the impact of paying 0.1 of a percentage point more is around £9 a month. This rises to around £12 a month for a £200,000 mortgage, and £15 for a £250,000 loan.
These figures only offer a very broad example, but they show that small rate hikes have a limited impact on the cost of borrowing.
Note: Calculations based on taking out a two-year fixed-rate mortgage at 95% loan-to-value over a 30-year term.
Remortgaging pain
If you’re buying a home, getting a rate of 5.49% or 5.39% might not make a huge difference, but if you’re remortgaging from a deal priced at 2%, your repayments will rise significantly.
While hopes remain that the cost of mortgages will fall in the second half of the year, the smart money is on rates remaining above 4% in the medium term.
The Office for Budget Responsibility forecasts that homeowners will be paying an average rate of 4.2% on their mortgage by 2027, compared to just over 3% now.
Unfortunately, there’s no way of avoiding these rate rises. However, if you’re coming up to remortgage, it might be wise to take advice from a mortgage broker on your options.
A good broker will be constantly monitoring the market in an attempt to ensure you get the best rate. This can be particularly useful at a time when deals are coming and going so quickly.
- Find out more: what to do if you need to remortgage
What will happen to the base rate – and when?
That’s the million dollar question. The rate drops we saw at the start of this year came at a time when a fall in the base rate – currently set at 5.25% – seemed rather more imminent.
In its most recent announcement on 1 February, the Bank’s Monetary Policy Committee (MPC) elected to maintain the current rate by majority vote. Six members voted to stick, two voted for a rise, and just one for a cut.
The next announcement is due next Thursday (21 March), but the mood music from the Bank of England is that even if inflation falls (the latest figures will be announced on Wednesday), an immediate rate cut is unlikely.
The research firm Capital Economics predicts that the base rate could begin to fall in June, but other forecasters believe the first cut could be as late as the autumn.
In the meantime, it’s likely that mortgage rates will remain fairly flat, with lenders lacking the margins to cut rates but reluctant to price themselves out of the market.
- Find out more: how the base rate affects your mortgage
Should I hold off on my plans to buy?
If you’re thinking of buying a home, the cost of borrowing might be giving you cause for concern.
However, if you can find a way of making the numbers add up, now could be a good time to get a bargain.
The slow market means houses are taking longer to sell, and sellers are having to be more realistic about their pricing.
This means that,as a buyer, you might hold the upper hand when it comes to negotiations.
- Find out more: what’s happening to house prices?
What to do if you can’t pay your mortgage
As we mentioned earlier, homeowners remortgaging this year will face much higher repayments than before.
Sadly, higher rates have resulted in more homeowners defaulting on their mortgages. Data from the Bank of England shows mortgage arrears hit a seven-year high in the last quarter of 2023.
If you are worried about being able to meet your repayments, you’re not alone.
The most important thing to do is contact your lender as soon as possible, as it may be able to offer support. This might include extending your mortgage term to reduce payments or temporarily switching to just paying the interest on the loan.
You can find out more in our guide on what to do if you’re struggling with your mortgage repayments.
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