According to Moneyfacts, the average two-year fixed mortgage rate is now at 6.7%. This is the highest it’s been since August 2008, at the peak of the financial crisis. So why are mortgage rates rising so quickly?
Mortgage rates last peaked in October 2022, when the average two-year fixed rate rose to 6.65% in the wake of the disastrous mini-budget. The markets were spooked by then-chancellor Kwasi Kwarteng’s radical economic policies, and anticipated significant changes to the base interest rate.
This caused lenders to hike their mortgage rates significantly. However, this proved to be a temporary blip. Once new chancellor Jeremy Hunt had reversed practically all of his predecessor’s policies, the markets calmed and rates began to fall again.
By the start of May, the average two-year fixed rate had sunk to 5.32%, a notable dip from October’s high of 6.65%. But later that month, mortgage rates began to rise, and quickly.
If you’re looking for a new mortgage deal, and want to see the kind of rates on offer, try our mortgage comparison tool*.
Why are mortgage rates at their highest level since 2008?
Lenders generally set their borrowing rates in accordance with the Bank of England’s base interest rate. When it goes up – or they predict that it will – lenders may respond by putting up their mortgage rates.
The Bank of England, in turn, is attempting to control high inflation by making changes to the base interest rate. It hopes that by increasing the base rate – which it has done 13 consecutive times – it will curtail spending and bring inflation down.
The annual inflation rate for the year to May was at 8.7%. This was unchanged from April’s level and still near a record-high. This meant that so far, the Bank of England’s aggressive rate increases had not been hugely effective.
The Bank of England responded by hiking the base interest rate from 4.5% to 5% in June. Market analysts have also revised their forecasts for how the base rate will change. Some anticipate it to peak as high as 6.5% by next year.
These dramatic changes have caused lenders to withdraw and reprice mortgage products. Mortgage rates have been rising since December 2021, when the average two-year fixed rate was 2.34%. But rates have particularly spiked over the last month.
As of today, the average two-year fixed-rate mortgage deal is at 6.7%, while the average five-year fixed rate is 6.2%. This marks the first time rates have increased above October’s peak following the mini-budget. It’s also their highest level since August 2008, when the average two-year fixed deal stood at 6.94%.
The graph below shows how rates have evolved since June. Find out when interest rates are predicted to go down.
Government borrowing costs have also jumped. It costs the British government annual interest of 4.67% to borrow over 10 years, two percentage points higher than Germany. It’s even more expensive for the UK government to borrow for the short term.
This, too, reflects the high inflation the UK is facing. This is because inflation devalues a countries currency, as its purchasing power becomes weaker. This means more of the currency must be repaid in interest.
Increased government borrowing costs have in turn filtered down to the interest rates charged by lenders, compounding the problem.
What do higher rates mean for me?
If you have a fixed-rate mortgage deal, you’ll be protected from any rate increases until the end of the term.
However, with around 2.6 million mortgage holders set to see their deals end by the end of 2024, many households could see their repayments skyrocket.
Since mid-May, average monthly repayments have jumped by £167 a month, or around £2,000 a year for a homeowner with a typical £200,000 25-year mortgage.
But if you’re coming to the end of a cheap fixed deal, the jump in your repayments could be much more substantial. This could see a large number of households struggle to make mortgage repayments.
Take, for example, a homeowner with a £200,000 loan, that took out a fixed-rate mortgage two years ago. If their interest rate was 2.3%, and they moved onto a new average fixed-rate deal today, they’d see their monthly repayments jump by around £500.
Following pressure from the government, lenders will offer struggling customers flexibility. This includes the possibility of temporarily moving to an interest-only mortgage for up to six months to lower monthly repayments.
If you’re struggling to make mortgage repayments, find out what help is available.
Read more: Six things to do now if your fixed-rate mortgage is coming to an end
Important information
Some of the products promoted are from our affiliate partners from whom we receive compensation. While we aim to feature some of the best products available, we cannot review every product on the market.
