UK homeowners can expect mortgage rates to gradually climb over the next few years, potentially reaching 4.2% by 2027. This is a significant jump from the 2% rate witnessed just over two years ago, as projected by the Office for Budget Responsibility (OBR).
The OBR’s announcement is particularly disheartening for current and prospective homeowners as it followed the chancellor Jeremy Hunt’s budget, which provided no assistance regarding mortgages – the term wasn’t even mentioned in his speech or the budget document.
This gloomy forecast aligned with various lenders, including Barclays and HSBC, either hiking rates on new mortgage products or withdrawing them entirely, due to increases in money market swap rates, which typically influence new fixed-rate mortgage pricing.
David Hollingworth from L&C Mortgages notes that while many homeowners have fixed-rate deals, they should prepare for rates to stay higher than the historic lows seen in recent years.
So, what should homeowners do in light of these developments?
Seek advice
The end of 2021 marked an all-time low for existing mortgage rates at 2%. However, fluctuations, notably inflation post-Russia’s invasion of Ukraine, have resulted in mortgage rates soaring. The OBR states that the average existing rate is now just over 3%.
Fresh rates for new fixes are spiking. For example, Moneyfacts indicated that the average new two-year fix is 5.78%, and for a five-year fix, it’s 5.34%.
Earlier this year, lending institutions were slashing fixed-rate costs, but recent weeks have seen a reversal of these discounts.
Rachel Springall from Moneyfacts advises staying informed on volatile swap rates and seeking advice as products can be withdrawn and replaced quickly.
Look at the long term
With fixed-rate terms coming to an end, homeowners are facing tough decisions. Securing a fix now means stability, but at the risk of missing out on potential future rate drops.
Mortgage advisors advocate for longer-term fixes, saying five-year deals tend to offer more attractive rates than shorter ones.
Some lenders, like First Direct, are providing competitive rates, offering 4.67% fixed for two years and 4.29% fixed for five years as long as the loan doesn’t exceed 60% of the home’s value.
Ranald Mitchell from Charwin Private Clients and Simon Bridgland from Release Freedom suggest that longer-term fixes are a better choice. Virgin Money’s “Fix and Switch” mortgage even allows a switch after two years without penalty.
Or bet on a tracker
Base-rate tracker mortgages have been gaining interest due to their responsiveness to the Bank of England base rate changes. Though, with an average new two-year tracker rate at 6.15%, they’re currently more expensive than fixed rates due to expectations of a fall in the base rate.
Graham Cox from SEMH warns that unless the base rate falls significantly, trackers may not be the best option currently. Gary Bush from MortgageShop.com suggests considering trackers only if they offer charge-free switching, which would allow a later fix if conditions improve.
It remains to be seen how the government’s tax changes on holiday lets will impact the housing market. The upcoming abolition of the favourable tax conditions for furnished holiday lettings (FHL) might incline owners to sell or seek other investments, posits Sarah Hollowell from Killik & Co.
