The latest Bank of England decision has been made on interest rates, but that doesn’t mean mortgage costs have stopped rising, according to one expert
Despite the Bank of England holding the base rate steady at 5.25%, recent months have seen fluctuations in mortgage and savings rates, says a leading financial information site.
This update comes as the 5.25% Bank of England base rate remained unmoved on Thursday, against the backdrop of inflation falling back to the 2% target last month for the first time since July 2021. The financial website Moneyfactscompare.co.uk noted an incremental climb in the average two-year fixed mortgage rate from 5.91% in early May to 5.93% come June, following a dip from December 2023s 6.04% mark.
Furthermore, the typical rate on a five-year fixed mortgage also nudged up marginally from 5.48% to 5.50% between May and June and down slightly from the 5.65% observed at the outset of December 2023. Currently, the average standard variable rate (SVR) the default interest rate post-initial deal conclusion, hovers at 8.18%, steadfast from last month, inching down just a whisker from December 2023’s 8.19%.
Finance guru Rachel Springall of Moneyfactscompare.co.uk said: “The rising cost of mortgages may cause deep concern for borrowers about to come off a fixed-rate deal and needing to refinance. Affordability is a pressing point for both homeowners looking to refinance and new buyers, so those struggling to see how they can afford mortgage repayments will no doubt be desperate for interest rates to come down.”
Homeowners unsure whether to lock into a new fixed-rate mortgage may still find it more affordable than falling onto a standard variable rate (SVR), which stands above 8%. She added: “This rate has almost doubled since the Bank of England started increasing base rate back in December 2021.”
According to calculations by Moneyfactscompare.co.uk. a mortgage holder on the current average SVR could end up paying £287 more per month compared with an average two-year fixed-rate mortgage. The calculations were based on a £200,000 mortgage borrowed over a 25-year term on a repayment basis, with SVR repayment of £1,567 per month, versus £1,280 monthly on a two-year fixed rate.
Ms Springall said that due to volatility in swap rates, which lenders use to price mortgages, they have increased fixed mortgage rates and withdrawn some deals priced below 5%. She continued: “As a result, the average two-year fixed-rate is nearing where it stood six months ago, undoing the positive rate cut momentum seen during the first quarter of 2024.”
“The average five-year fixed rate has remained above 5% since June 2023, dipping above and below 6% over the past six months. At present, it’s cheaper to lock into a five-year fixed mortgage than a two-year deal, based on average rates, which has been the case since October 2022.”
“First-time buyers who are struggling to get their foot onto the property ladder and don’t have the ‘bank of mum and dad’ to lean on may feel getting a mortgage is too far out of reach right now.”
Trade association UK Finance has revealed that around 1.6 million fixed-rate mortgages are set to expire or have already done so at some point in 2024. Bank of England data indicates that the total value of outstanding mortgage balances with arrears has soared to its highest level since 2014.
The first quarter of 2024 saw a 4.2% increase from the previous quarter in the value of outstanding mortgage balances with arrears, hitting £21.3billion, as per the latest mortgage lenders and administrators statistics. In a stark illustration of the current affordability squeeze, recent figures from UK Finance show that about one in five new first-time buyers opted for mortgage terms extending beyond 35 years in the initial quarter of this year.
UK Finance stated that some 21% of first-time homebuyers are now saddled with mortgages stretching over more than 35 years. By choosing longer mortgage terms, borrowers can make their monthly repayments more manageable, but they risk accruing higher interest charges over the extended period.
Turning to savings, Moneyfactscompare.co.uk figures show that the average easy access rate stood at 3.12% at the beginning of June, a slight rise from 3.11% at the start of May but a drop from 3.18% at the beginning of December.
The average easy access Isa rate is currently at 3.31%, unchanged since the beginning of December but slightly lower than the 3.33% seen at the start of May. Ms Springall remarked: “Savers looking for a flexible pot to store their hard-earned cash may feel relieved that rates have not fallen too much over the past six months.”
“The top rate tables continue to be dominated by challenger banks and building societies, but with the average rate on easy access accounts around 3%, there will be many savers out there getting a poor return. Consumers would be wise to review their rate if they have not done so over the past six to 12 months. Loyalty does not always pay.”
David Murray, a financial planning expert at abrdn, commented: “While no cut to interest rates is good news for savers, home owners and would-be-first-time buyers will likely see no change or even a rise in mortgage rates, which will provide plenty of heartache for those that have been pinning their hopes on a June drop.”
Nathan Emerson, chief executive of Propertymark, said: “Propertymark remain keen to see rates reduced when circumstances allow and for this to then translate into competitive mortgage deals from lenders at the first opportunity.”
Bank of England governor Andrew Bailey has declared that policymakers “need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now”.
David Hollingworth, from L&C Mortgages, shared his insights: “Mortgage rates are showing more stability and although they continue to nudge up and down as lenders adjust, they remain substantially below the highs of last summer when rates spiked. Those holding out in hope of a rapid fall in mortgage rates may have a wait on their hands.”
Meanwhile, Lucian Cook of Savills explained the wider implications of rate cuts: “The first rate cut will be vital in boosting consumer confidence. Even if it doesn’t immediately change the headline cost of fixed rate mortgages, it will begin to make it easier for borrowers to meet banks’ affordability tests, which are more closely linked to the rates banks offer when such deals come to an end.”
Mr Cook added: “In turn, that is likely to make the market progressively less dependent on the cash and equity-rich buyers, allowing those who have put off plans to trade up the housing ladder over the past two years to step back into the market.”
